-----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, UaO1IN4aOCJjS3BYV9c3tBHx0iNP9YZ4gk1/ZFo6jPQulrmETeUDznwQFShbhfmV BwLpTGdPWo3VXxYEWUqdFg== 0000891618-99-002206.txt : 19990514 0000891618-99-002206.hdr.sgml : 19990514 ACCESSION NUMBER: 0000891618-99-002206 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONNETICS CORP CENTRAL INDEX KEY: 0001004960 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 943173928 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27406 FILM NUMBER: 99620966 BUSINESS ADDRESS: STREET 1: 3400 W BAYSHORE RD CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 4158432800 MAIL ADDRESS: STREET 1: 3400 W BAYSHORE RD CITY: PALO ALTO STATE: CA ZIP: 94303 FORMER COMPANY: FORMER CONFORMED NAME: CONNECTIVE THERAPEUTICS INC DATE OF NAME CHANGE: 19951214 10-Q 1 FORM 10-Q FOR THE PERIOD ENDING 3/31/99 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 Commission file number: 0-27406 CONNETICS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 94-3173928 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 3400 WEST BAYSHORE ROAD PALO ALTO, CALIFORNIA 94303 (Address of principal executive offices) Registrant's telephone number, including area code: (650) 843-2800 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 at least the past 90 days. Yes [X] No [ ] As of April 30, 1999, 21,339,070 shares of the Registrant's common stock were outstanding, at $0.001 par value. 2 CONNETICS CORPORATION QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999 TABLE OF CONTENTS
Page ---- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets at March 31, 1999 and December 31, 1998 ... 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998 ................................................... 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998 ................................................... 5 Notes to Condensed Consolidated Financial Statements ............................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................................... 8 Item 3. Quantitative and Qualitative Disclosures About Market Risks ..................... 12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ................................................ 13 Exhibits ........................................................................ 13 Reports on Form 8-K ............................................................. 13 SIGNATURE .......................................................................................... 14
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONNETICS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
MARCH 31, DECEMBER 31, 1999 1998 ----------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 15,646 $ 14,708 Short-term investments 6,813 8,312 Accounts and other receivables 1,201 485 Other current assets 863 118 --------- --------- Total current assets 24,523 23,623 Property and equipment, net 1,613 1,128 Notes receivable from related parties 380 379 Deposits and other assets 127 104 License agreements and product rights 4,480 6,160 --------- --------- $ 31,123 $ 31,394 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,464 $ 1,229 Accrued and other current liabilities 1,459 879 Accrued process development expenses 717 644 Accrued payroll and related expenses 763 1,003 Current portion of notes payable and other liabilities 6,662 6,822 Current portion of capital lease obligations, capital loans and long-term debt 894 582 --------- --------- Total current liabilities 13,959 11,159 Noncurrent portion of capital lease obligations, capital loans and long-term debt 3,810 4,002 Other long-term liabilities 2,111 3,781 Stockholders' equity: Common stock, treasury stock and additional paid-in capital 109,923 105,285 Notes receivable from stockholders (65) (65) Deferred compensation, net (217) (302) Accumulated deficit (98,392) (92,469) Accumulated other comprehensive income (loss) (6) 3 --------- --------- Total stockholders' equity 11,243 12,452 ========= ========= $ 31,123 $ 31,394 ========= =========
See notes to condensed consolidated financial statements. - 3 - 4 CONNETICS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------- 1999 1998 -------- -------- Revenues: Product $ 2,161 $ 1,519 Contract 5,000 -- -------- -------- Total revenues $ 7,161 $ 1,519 Operating cost and expenses: Cost of product revenue 1,171 295 License amortization 1,680 1,680 Research and development 4,681 2,178 Selling, general and administrative 5,594 2,462 -------- -------- Total operating cost and expenses 13,126 6,615 Interest income 334 177 Interest expense (292) (394) -------- -------- Net loss $ (5,923) $ (5,313) ======== ======== Basic and diluted net loss per share $ (0.28) $ (0.39) ======== ======== Shares used to calculate net loss per share 21,088 13,489 ======== ========
See notes to condensed consolidated financial statements. - 4 - 5 CONNETICS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------- 1999 1998 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (5,923) $ (5,313) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 1,859 1,909 Amortization of deferred compensation 637 116 Accrued interest on notes payable -- 288 Changes in assets and liabilities: Accounts receivable (716) 960 Current and other long-term assets (532) (1,190) Current and other liabilities 2,648 (429) Other long-term liabilities 670 132 -------- -------- Net cash used in operating activities (1,357) (3,527) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of short-term investments (2,784) (882) Sales and maturities of short-term investments, net 4,274 2,278 Capital expenditures (664) (27) -------- -------- Net cash provided by (used in) investing activities 826 1,369 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Payment of notes payable (2,500) -- Payments of obligations under capital leases and capital loans (117) (597) Proceeds from issuance of common stock, net of issuance costs 4,086 25 -------- -------- Net cash provided by financing activities 1,469 (572) -------- -------- Net change in cash and cash equivalents 938 (2,730) Cash and cash equivalents at beginning of period 14,708 8,452 ======== ======== Cash and cash equivalents at end of period $ 15,646 $ 5,722 ======== ======== SUPPLEMENTARY INFORMATION: Interest paid $ 173 $ 105
See notes to condensed consolidated financial statements. - 5 - 6 CONNETICS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Connetics Corporation ("Connetics") have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, such financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accrual adjustments, considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. These financial statements and notes should be read in conjunction with audited financial statements and notes to those financial statements for the year ended December 31, 1998 included in Connetics' Annual Report on Form 10-K. 2. NET LOSS PER SHARE The computation of diluted earnings per share does not include options to purchase 2,485,568 shares of common stock at exercise prices ranging from $0.4448 to $11.00 and warrants to purchase 1,289,193 shares of common stock at exercise prices ranging from $4.89 to $11.00 as their effect would be antidilutive. 3. COMPREHENSIVE INCOME During the three months ended March 31, 1999, total comprehensive (loss) amounted to $(5.9) million compared to $(5.3) million for the same period in 1998. The components of comprehensive (loss) for the three-month period ended March 31, 1999 and 1998 are as follows:
Three months ended March 31, -------------------- (In thousands) 1999 1998 ------- ------- Net loss $(5,923) $(5,313) Unrealized (loss) on securities (9) (2) Foreign currency translation adjustment -- -- ------- ------- Comprehensive (loss) $(5,932) $(5,315) ======= =======
- 6 - 7 The components of accumulated other comprehensive income (loss) at March 31, 1999 and December 31, 1998 are as follows:
(In thousands) 1999 1998 ------ ------ Unrealized gains (loss) on securities $ (6) $ 3 Foreign currency translation adjustments -- -- ------ ------ Accumulated comprehensive income (loss) $ (6) $ 3 ------ ------
4. RESEARCH AND LICENSE AGREEMENT In January 1999, Connetics entered into a development, commercialization and supply agreement with Medeva PLC of the United Kingdom ("Medeva") for certain therapeutic indications pertaining to relaxin. Under the terms of the agreement, Medeva paid $8.0 million upon closing, which included a $4.0 million contract fee and a $4.0 million equity investment, and will pay $17.0 million of milestone payments based upon the achievement of development milestones in the U.S. and Europe and $5.0 million for the development and approval of each indication in Europe in addition to scleroderma. Medeva is responsible for all development and commercialization activities in Europe and is required to pay royalties on sales in Europe. In addition, Medeva will reimburse Connetics for 50% of the product development costs in the U.S. up to a maximum of $1.0 million per quarter, for an estimated total of $10.0 million. Medeva also agreed to share U.S. co-promotion rights with Connetics for up to five years, and will also purchase relaxin materials from Connetics. During the quarter ended March 31, 1999. Connetics recorded $5.0 million in contact revenue ($4.0 million in contract fee and $1.0 million for the quarterly reimbursement of product development costs) under this agreement. 5. SUBSEQUENT EVENT On April 28, 1999, Connetics executed its plan to spin-off InterMune Pharmaceuticals, Inc. ("InterMune"), through the sale of a majority of its equity ownership to outside investors. Connetics established InterMune to develop Actimmune(R) (interferon gamma) for infectious and antifungal diseases shortly after it in-licensed Actimmune from Genentech, Inc. in May 1998. At the close of the spin-off, Connetics retained approximately a 10% equity position in InterMune, received a $500,000 cash payment, and will receive additional cash and equity payments over the next three years. Connetics will retain commercial rights to and revenue from Actimmune for chronic granulomatous disease for three years and receive a royalty on Actimmune sales thereafter. In addition, Connetics retains the product rights for potential dermatological applications of Actimmune. 6. LIQUIDITY AND FINANCIAL VIABILITY In the course of its development activities, Connetics has sustained continuing operating losses and expects such losses to continue over at least the next few years. Connetics plans to continue to finance its operating activities with a combination of stock sales, through public offerings and self-managed private financings, payments from corporate partnering arrangements, product revenue, bank loans and/or debt financing. Ultimately, Connetics' ability to continue as a going concern in the future is dependent upon obtaining additional financings. - 7 - 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECIAL NOTE: EXCEPT FOR THE HISTORICAL INFORMATION, THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A") CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. CONNETICS' ACTUAL RESULTS OF OPERATIONS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE IDENTIFIED BELOW. POTENTIAL RISKS AND UNCERTAINTIES INCLUDE, WITHOUT LIMITATION, UNCERTAINTY OF PRODUCT DEVELOPMENT AND MARKET ACCEPTANCE OF A PRODUCT ONCE DEVELOPED; UNCERTAINTY OF FUTURE RIDAURA(R), LUXIQ(TM) AND ACTIMMUNE(R) REVENUES AND COSTS; UNCERTAINTY OF CLINICAL TRIALS RESULTS; UNCERTAINTY OF FUTURE PROFITABILITY; FUTURE CAPITAL REQUIREMENTS AND UNCERTAINTY OF FUTURE FUNDING; AND RISKS ASSOCIATED WITH POSSIBLE FUTURE PRODUCT ACQUISITIONS. IN PARTICULAR, THE FACTORS SET FORTH IN THE CONNETICS' ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, MAY CAUSE ACTUAL RESULTS TO VARY FROM THOSE CONTEMPLATED BY CERTAIN FORWARD-LOOKING STATEMENTS SET FORTH IN THIS REPORT AND SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO OTHER INFORMATION PRESENTED IN THIS REPORT. This MD&A should be read in conjunction with the MD&A included in Connetics' 1998 Annual Report on Form 10-K, and with the unaudited condensed consolidated financial statements and notes to financial statements included in Part I, Item 1 of this Quarterly Report. Results of operations in the current or any prior fiscal period should not be considered as indicative of results to be expected for any future fiscal period. OVERVIEW Connetics Corporation acquires, develops and markets products in the areas of dermatology and rheumatology. We market Riduara(R) (auranofin), a treatment for rheumatoid arthritis, and in January 1999, we began marketing Actimmune(R) (interferon gamma) for the treatment of chronic granulomatous disease ("CGD"), under a license we acquired from Genentech Inc. in May 1998. In March 1999, we received marketing clearance from the U.S. Food and Drug Administration ("FDA") to sell Luxiq(TM) (betamethasone valerate) Foam, 0.12%, for the treatment of scalp psoriasis. Our products under development include OLUX(TM) (clobetasol propionate 0.05%) for the treatment of severe scalp dermatoses; ConXn(R) (human recombinant relaxin-H2) for the treatment of scleroderma, infertility and organ fibrosis; and T-cell receptor (TCR) peptide vaccines for the treatment of multiple sclerosis and rheumatoid arthritis. There can be no assurance that any of our potential products will be successfully developed, receive the necessary regulatory approvals or be successfully commercialized. In January 1999, Connetics entered into a development, commercialization and supply agreement with Medeva PLC of the United Kingdom ("Medeva") for certain therapeutic indications pertaining to relaxin. Under the terms of the agreement, Medeva paid $8.0 million upon closing, which included a $4.0 million contract fee and a $4.0 million equity investment, and will pay $17.0 million of milestone payments based upon the achievement of development milestones in the U.S. and Europe and $5.0 million for the development and approval of each indication in Europe in addition to scleroderma. Medeva is responsible for all development and commercialization activities in Europe and is required to pay royalties on sales in Europe. Medeva will reimburse us for 50% of our product development costs in the U.S. up to a maximum of $1.0 million per quarter for an estimated total of $10.0 million. Medeva also agreed to share U.S. co-promotion rights with Connetics for up to five years, and will also purchase relaxin materials from us. In February 1999, we initiated a Phase II/III pivotal clinical trial of ConXn for the treatment of scleroderma. The primary objective of this study is to evaluate the efficacy of the product over 24 weeks of treatment, and we expect to enroll up to 200 patients with diffuse scleroderma, a serious, life-threatening connective tissue disorder. Patients in the trial will be randomized to receive relaxin at one of two dose levels (25 (greek mu)g/kg/day or 10 (greek mu)g/kg/day) or placebo. The study is designed to evaluate the - 8 - 9 effects of relaxin on skin fibrosis, activities of daily living, quality of life and vital organ function. The primary endpoint for the trial is an improvement in the Modified Rodnan Skin Score, a measurement of skin thickness, at 17 areas of the body. In March 1999, we announced promotion agreements with MGI Pharma, Inc. ("MGI") for our Ridaura and Luxiq products. Under the terms of the agreements, MGI will promote Ridaura and Luxiq to the rheumatology market in the United States in exchange for promotional fees. This arrangement takes advantage of MGI's specialty sales force that calls on rheumatologists and oncologists in the United States, and allows Connetics to focus its attention on the dermatology marketplace. RESULTS OF OPERATIONS Our product revenues for the first quarter of 1999 were derived from the sales of Ridaura and Actimmune. For the three months ended March 31, 1999, revenue from the sales of Ridaura was $1.3 million and revenue from the sales of Actimmune was $0.9 million compared to $1.5 million from the sales of Ridaura only for the same period in 1998. We believe the $0.2 million decrease in Ridaura revenue for the period may be due to recent introduction of new rheumatoid arthritis therapies and the shifting of our commercialization focus from rheumatology to dermatology in anticipation of our Luxiq product launch. There can be no assurance that Connetics will be able to market and sell Ridaura successfully or that Ridaura revenues will equal or exceed those achieved in 1998, and as a result our financial condition and results of operations could be materially and adversely affected. In connection with our agreement with Medeva (discussed above), we recorded $5.0 million in contract revenue ($4.0 million in contract fee and $1.0 million for the quarterly reimbursement of product development costs) for the quarter ended March 31, 1999. Connetics has separate supply agreements with SmithKline Beecham Corporation and Genentech, Inc. under which SmithKline will manufacture and supply Ridaura in final package form through December 2001, and Genentech will manufacture and supply interferon gamma, in bulk or finished form through May 2001. In addition, we have a distribution arrangement with CORD Logistics, Inc. ("CORD") whereby customer orders and distribution of our current marketed products are managed by CORD. Our cost of product revenues includes the cost of Ridaura purchased from SmithKline, cost of Actimmune purchased from Genentech, royalty payments due SmithKline and Genentech based on a percentage of our product revenues, product freight costs and distribution costs from CORD. For the three months ended March 31, 1999, we recorded $1.2 million in cost of product revenues compared to $0.3 million for the same period in 1998. The increase of $0.9 in cost of product revenues is primarily due to incremental costs associated with the sales of Actimmune, including higher product and royalty costs. Amortization expense associated with the acquisition of product rights to Ridaura were $1.7 million for the same periods in 1999 and 1998, respectively. Research and development expenses were $4.7 million for the three months ended March 31, 1999 compared to $2.2 million for the same period in 1998. The increase in research and development expenses of $2.5 million was primarily due to the commencement of relaxin manufacturing scale-up activities (which accounted for approximately 60% of the increase), the initiation of a 200 patient Phase II/III pivotal trial of ConXn for the treatment of scleroderma and staffing up of the development organization. Research and development expenses are expected to increase over the next few quarters due to relaxin manufacturing activity, ConXn clinical trial activities, pre-manufacturing start-up costs associated with qualifying a new supplier for OLUX and possible acquisition of new technologies and products. Selling, general and administrative expenses increased to $5.6 million for the three months ended March 31, 1999 compared to $2.5 million for the same period in 1998. The increase in expenses was primarily due to further staffing up of the sales organization (twenty additional new hires for a total of forty-four as - 9 - 10 of March 31, 1999 compared to seventeen for the same period in 1998), pre-market launch expenses associated with Luxiq, increased activities of an established sales and marketing organization, and stock compensation related expenses. Selling, general and administrative expenses are expected to increase primarily due to co-promotion expenses associated with our agreement with MGI (discussed above), costs associated with marketing Luxiq, Ridaura and Actimmune, additional hiring of sales representatives, and possible launching of acquired products. Interest income was $334,000 in the three months ended March 31, 1999, compared with $177,000 for the same period in 1998. The increase in interest income during the first three months of 1998 was due to a higher investment balance as a result of the $9.0 million received in January from Medeva (discussed above). Interest earned in the future will depend on our funding cycles and prevailing interest rates. Interest expense decreased to $292,000 for the three months ended March 31, 1999, compared with $394,000 for the same period in 1998. The decrease in interest expense was the result of lower balances outstanding for obligations under capital leases and loans, and notes payable. Net loss for the three months ended March 31, 1999 was $5.9 million compared to $5.3 million for the same period in 1998. The increase in net loss was due to higher cost of product sold and a substantial increase in operating expenses in 1999 as a result of development, marketing and sales activities. The increase was offset for the most part by higher revenue recorded for the quarter that included $5.0 million contract revenue associated with the Medeva agreement. We expect to incur additional losses over the next few years and losses are expected to fluctuate from period to period based on timing of product revenues, clinical material purchases, clinical trial expenses, and possible acquisitions of new products and technologies. LIQUIDITY AND CAPITAL RESOURCES Connetics has financed its operations to date primarily through proceeds from its initial public offering in February 1996, six self-managed financings, collaborative arrangements with corporate partners and bank loans. At March 31, 1999, cash, cash equivalents and short-term investments totaled $22.5 million, a decrease of $0.5 million from $23.0 million at December 31, 1998. In the first quarter of 1999, we received $9.0 million from Medeva as a result of a collaborative arrangement. Cash used in operations for the three months ended March 31, 1999 was $1.4 million compared with $3.5 million for the same period in 1998. Net loss for the first three months of 1998 was affected by non-cash charges of $1.8 million depreciation and amortization expense and $0.6 million deferred compensation expense. Cash outflow for the quarter was primarily for operating activities, including an increase in our net loss to $5.9 million, receivables at March 31, 1999 of $0.7 million due to higher product sales, and inventory of $0.6 million due primarily to carrying Luxiq inventory in preparation for the market launch in April. These increases were partially offset by an increase in accounts payable and accrued liabilities at March 31, 1999 of $2.8 million due to higher development, sales and marketing expenses. Investing activities, other than the changes in Connetics' short-term investments, consumed $0.7 million in cash during the three month period ended March 31, 1999, due to leasehold improvements and equipment expenditures required for operations. Cash provided by financing activities was $1.5 million for the three months ended March 31, 1999 compared with cash usage of $0.6 million for the same period in 1997. The agreement with Medeva provided $4.0 million investment in our common stock. This was offset in part by a $2.5 million principal payment to SmithKline for obligations under a promissory note in connection with the Ridaura acquisition. Working capital decreased by $1.9 million to $10.6 million at March 31, 1999 from $12.5 million at December 31, 1998. The decrease in working capital was due to our use of cash in operations and higher - 10 - 11 accounts payable and accrued liabilities as a result of increased development, sales and marketing expenses, offset in part by higher accounts receivable, inventory and prepaid expenses. At March 31, 1999, Connetics had an aggregate of $13.5 million in future obligations of principal payments under capital leases, loans, long-term debt and other obligations, of which $7.6 million is to be paid within the next year. Connetics has an equity line agreement with an investor that may potentially provide access to capital through sales of our common stock. The three-year equity line became available on June 26, 1998. During the three-year term, if our stock meets certain volume restrictions and trades above $10.00, then up to $500,000 would be drawn against the equity line approximately every three months in exchange for the sale of stock at an approximate minimum price of $10.00. We believe our existing cash, cash equivalents and short-term investments along with cash generated from the sales of Ridaura, Luxiq and Actimmune, and from financings will be sufficient to fund our operating expenses, debt obligations and capital requirements through early 2000. Our future capital uses and requirements depend on numerous factors, including the progress of our research and development programs, the progress of clinical testing, the time and costs involved in obtaining regulatory approvals, the cost of filing, prosecuting, and enforcing patent claims and other intellectual property rights, competing technological and market developments, our ability to establish other collaborative arrangements, the level of product revenues, the possible acquisition of new products and technologies and the development of commercialization activities. Therefore such capital uses and requirements may increase in future periods. As a result, we will require additional funds prior to reaching profitability and may attempt to raise additional funds through equity or debt financings, collaborative arrangements with corporate partners or from other sources. Other than the equity line agreement discussed above, we currently have no commitments for any additional financings, and there can be no assurance that additional funding will be available to finance our ongoing operations when needed or, if available, that the terms for obtaining such funds will be favorable or will not result in dilution to the our stockholders. Our inability to obtain sufficient funds could require us to delay, scale back or eliminate some or all of our research and development programs, to limit the marketing of our products or to license to third parties the rights to commercialize products or technologies that we would otherwise seek to develop and market ourselves. IMPACT OF YEAR 2000 Many computer systems and software applications were not designed to handle dates beyond the year 1999, and therefore will need to be modified prior to year 2000 in order to remain functional. As for many other companies, the year 2000 issue poses a potential risk for Connetics and as a result, computer systems and/or software used by many companies, including Connetics, may need to be upgraded to comply with such "Year 2000" requirements. We have completed an assessment of our core business information systems and related business processes used in our operations, most of which are provided by outside suppliers. To date, we have completed testing and upgrading of approximately 93% of our information technology systems and expect to have all remaining systems upgraded by June 30, 1999. We are approximately 72% complete with the testing and upgrading of our operating equipment and expect the process to be fully completed by June 30, 1999. We have on-line access to our third party distribution service system that includes customer orders, billing, shipping and inventory management. This vendor has made its distribution system Year 2000 compliant, and we converted to the compliant system in November 1998. Our reliance on key suppliers, and therefore on the proper functioning of their information systems and software, is increasing, and there can be no assurance that another company's failure to address year 2000 issues might not have an adverse effect on Connetics. We have initiated formal communications with each of our significant suppliers and customers to determine the extent of our vulnerability to those - 11 - 12 third parties' failure to remediate their own Year 2000 issues. We have requested that third party vendors represent their products and services to be Year 2000 compliant and that they have a program to test for Year 2000 compliance. However, the response of those third parties is beyond our control. We are in the process of evaluating the need for contingency plans with respect to Year 2000 requirements. The necessity of any contingency plan must be evaluated on a case-by-case basis and will vary considerably in nature depending on the Year 2000 issue it may need to address. However, there can be no assurance that we may be able to solve all potential Year 2000 issues, and if we fail to correct a material Year 2000 problem, our normal business activities and operations could be interrupted. Such interruptions could have a material adverse affect on Connetics' results of operations, liquidity and financial condition. To date, Year 2000 costs are not considered to be material to our financial condition. We have incurred and expensed approximately $40,200 and currently estimate that, in order to complete Year 2000 compliance, we will be required to incur total expenditures of approximately $50,000. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Connetics has supply contracts with Boehringer Ingelheim Austria GmbH (for a product under research and development) and CCL Pharmaceuticals Ltd. in the U.K. (for Luxiq). As payments under these contracts are payable in local currency, our financial results could be affected by changes in foreign currency exchange rates. We have a bank loan that is sensitive to movement in interest rates. Interest income from our investments is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. Due to the nature of our short-term investments, we have concluded that there is no material market risk exposure. Therefore, no quantitative tabular disclosures are required. - 12 - 13 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. See Index to Exhibits. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended March 31, 1999. - 13 - 14 SIGNATURE Pursuant to the requirements 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. CONNETICS CORPORATION By: /s/ JOHN L. HIGGINS ------------------------------------------ John L. Higgins Vice President, Finance and Administration and Chief Financial Officer Date: May 13, 1999 - 14 - 15 INDEX TO EXHIBITS
Exhibit Number Description - ------ ----------- 10.1 Promotion Agreement effective as of April 1, 1999 between the Company and MGI Pharma, Inc. 10.2* Co-promotion Agreement effective as of April 1, 1999 between the Company and MGI Pharma, Inc. 10.3* Amendment No. Two to License Agreement, effective as of January 15, 1999, between the Company and Genentech, Inc. 10.4* Amendment No. Three to License Agreement, effective as of April 27, 1999, between the Company and Genentech, Inc. 10.5(M) Restricted Common Stock Purchase Agreement dated March 9, 1999 between the Company and Kirk Raab 10.6(M) Restricted Common Stock Purchase Agreement dated March 9, 1999 between the Company and Thomas G. Wiggans 10.7 Collaboration Agreement dated April 27, 1999 between the Company and InterMune Pharmaceuticals, Inc. 10.8 Series A-1 and A-2 Preferred Stock Purchase Agreement dated April 27, 1999 among the Company, InterMune Pharmaceuticals, Inc., and various other investors 10.9* Transition Agreement dated April 27, 1999 between the Company and InterMune Pharmaceuticals, Inc. 27.1 Financial Data Schedule (EDGAR - filed version only)
- --------------- * The Company has omitted certain portions of this Exhibit and has requested confidential treatment of such portions from the SEC. (M) Represents a management compensatory plan or arrangement required to be listed as an exhibit to this form pursuant to Item 601(a)(10)(iii) of Regulation S-K. EX-10.1 2 PROMOTION AGREEMENT EFFECTIVE AS OF APRIL 1, 1999 1 EXHIBIT 10.1 PROMOTION AGREEMENT THIS PROMOTION AGREEMENT is effective as of April 1, 1999 by and between Connetics Corporation ("Connetics") and MGI Pharma, Inc. ("MGI"). B A C K G R O U N D A. Connetics has marketing rights in the United States to a pharmaceutical product known as Ridaura(R). B. MGI has experience and expertise in the marketing of rheumatological products and other pharmaceutical products administered, dispensed and prescribed primarily by the same health care professionals who are expected to administer, dispense and prescribe Ridaura(R). C. MGI has a professional sales force that calls on physicians and other health care professionals in order to promote various MGI products. D. Connetics desires to enhance its marketing of Ridaura(R) in the United States by enlisting the support and participation of MGI and the MGI Sales Force (as defined below) in the marketing effort. NOW, THEREFORE, in consideration of the Background and the mutual promises contained in this Agreement, Connetics and MGI agree as follows: A G R E E M E N T ARTICLE 1 DEFINITIONS "AFFILIATE" means in respect of either party any corporation or business entity controlled by, controlling, or under common control with Connetics or MGI, respectively. For this purpose "control" means the direct or indirect beneficial ownership of at least fifty percent (50%) of the voting stock of, or at least fifty percent (50%) interest in the income of, such corporation or other business entity, or such other relationship as, in fact, constitutes actual control. "BEST EFFORTS" means those efforts that would be made by a reasonably prudent business person acting in good faith in the exercise of reasonable commercial judgment. "CALL" means a presentation of the Product by a professional sales representative to a physician or other health care professional or organization licensed to administer, dispense or prescribe prescription drugs during a visit which is for the purpose of actively promoting the sale of the Product. 2 "COORDINATOR" means the person appointed by each of Connetics and MGI in accordance with SECTION 3.1. "COST OF GOODS" shall mean shall mean the cost of Product manufactured in final form by or on behalf of Connetics, including without limitation, all direct and indirect costs for material, labor and production overhead included in manufacturing, producing and supplying Products in the Territory, royalties paid to third parties, distribution costs, and freight and other transportation costs, including insurance charges, and duties, tariffs, sales and excise taxes and other governmental charges based directly on sales turnover or delivery of such Product and actually paid and allowed by Connetics, all calculated in accordance with U.S. generally accepted accounting principles. "EFFECTIVE DATE" means the date first written above. "FDA" means the United States Food and Drug Administration. "GOOD CAUSE" means (a) the material failure of the other party to comply with its material obligations contained in this Agreement. Material obligations include, without limitation, the failure of MGI to provide the full level of detailing and promotional support required under ARTICLES 2 AND 4 for a period of five (5) consecutive quarters, or the failure of Connetics to make the payments required by SECTION 5.1; or (b) the filing of a petition by or against the other party under any bankruptcy, insolvency or similar law (which petition is not dismissed within sixty (60) days after filing); the appointment of a receiver for the other party's business or property; or the other party's making of a general assignment for the benefit of its creditors; or (c) any force majeure event as defined in SECTION 11.6 affecting the other party beyond the other party's control that lasts for a period of at least six (6) months and which is of sufficient intensity to interrupt or prevent the carrying out of the totality of such other party's material obligations under this Agreement during such period. "GROSS MARGIN" means Net Sales less Cost of Goods. "INABILITY TO SUPPLY" shall have the meaning set forth in SECTION 6.4. "JOINT MARKETING TEAM" means the committee appointed pursuant to SECTION 3.2 of this Agreement. "MGI PHYSICIANS" means physicians specializing in rheumatology or internal medicine. "MGI SALES FORCE" means all of the Representatives employed by MGI. "NDA" means the new drug application (including supplements) for the Product submitted to the FDA (which MGI has the right to audit at any time). "NET SALES" shall mean the gross amounts invoiced by Connetics for Product in the Territory in accordance with U.S. generally accepted accounting principles, less the following amounts directly chargeable to such Products: (a) customary trade, quantity or cash discounts and rebates, actually allowed and taken; (b) allowances for estimated returns, rebates and chargebacks; (c) uncollectible amounts; and (d) recalls. Page 2 3 "PRODUCT" means the disease-modifying antirheumatic drug product (DMARD), trade name Ridaura(R), as described in the product specifications of the NDA, as it may be amended from time to time including any improvements thereto. "PRODUCT INFORMATION" means the dossier, regulatory status and information, data and results of clinical and other trials and investigations relating to the Product, including the NDA and right of cross-reference to the NDA, together with all other information relating to the specification of the Product and information relating to the manufacture (including method, conditions, and process equipment), testing (including quality control standards, assay methods and stability studies), storage and use of the Product now or hereafter during the term of this Agreement in the possession or under the control of Connetics. "PROMOTION PLAN" means a plan developed by the Joint Marketing Team for the detailing and promotion of the Product in the Territory, and shall include promotional strategies, detailing plans, pricing and budgets for promotional activities (including the development of materials for the detailing and promotion of the Product) for each defined detailing period in which MGI participates during the Term of this Agreement. "PROPRIETARY INFORMATION" means any information of value to either party, not generally known to the public, including (but not limited to): (a) the Product Information; the development status of the Product; Product indications and modes of administration; technical information, such as clinical, biological, manufacturing, pharmaceutical and characterizing data; and know-how; (b) business information, such as reports; records; markets; customer lists; supplier lists; marketing and sales plans; financial information; costs; and pricing information; and (c) pharmacoeconomic analyses, if any, conducted by Connetics with respect to the Product. "QUARTER" means a calendar quarter. "REPRESENTATIVES" means sales representatives employed by MGI for detailing the Product in the Territory to MGI Physicians. "TERRITORY" means the United States of America, including its territories and possessions. "VISIT" means a visit by a professional sales representative to a physician or other health care professional or organization licensed to administer, dispense or prescribe prescription drugs for the purpose of actively promoting the sale of products. "YEAR" means the period beginning with a given anniversary of the Effective Date and ending at the end of the day before the next anniversary of that date. Page 3 4 ARTICLE 2 GRANTS AND OBLIGATIONS SECTION 2.1. GRANT TO MGI. Connetics hereby grants to MGI, during the Term of this Agreement, the exclusive right to detail and promote the Product in the Territory to MGI Physicians. During the Term of this Agreement, neither Connetics nor an Affiliate of Connetics will authorize, or grant the right to, any third party the rights to detail, promote, or market the Product in the Territory as are granted to MGI hereunder, without MGI's prior written consent which may be granted in MGI's sole discretion. SECTION 2.2. MGI's OBLIGATIONS. Subject to the provisions of and during the Term of this Agreement, MGI shall use its Best Efforts to detail and promote the Product in the Territory to MGI Physicians according to the Promotion Plan and in such manner and with such expedition as MGI itself would have adopted in detailing and promoting a product of its own invention, including but not limited to the use of its trained and qualified Sales Force to make Calls on physicians and other persons and organizations licensed to administer, dispense and prescribe prescription drugs with respect to the Product. Subject to the obligations set forth in SECTION 2.3 and ARTICLE 4, and in particular SECTIONS 4.3 and 4.5, nothing in this Agreement is intended to prevent MGI from marketing and/or promoting other products either during the term of this Agreement or thereafter. SECTION 2.3. COMPETITION. During the term of this Agreement, MGI will not promote products that directly compete with the Product. The Joint Marketing Team will review and approve promotional materials of related products to prevent direct promotion of MGI products against the Product. Subject to the first sentence of this Section, MGI may promote other products, including DMARDS, during the term of this Agreement and thereafter. ARTICLE 3 GOVERNANCE SECTION 3.1. COORDINATOR. Connetics and MGI shall each appoint an authorized and knowledgeable representative ("Coordinator") to direct communications. Each party will promptly notify the other as to the name of the individual so appointed. Each party may replace its Coordinator at any time, upon prompt written notice to the other party. SECTION 3.2. JOINT MARKETING TEAM. Within thirty (30) days following the Effective Date, the Coordinators shall establish a "Joint Marketing Team" consisting of representatives of Connetics and representatives of MGI appointed by the respective Chief Executive Officers of each party. The Joint Marketing Team will be directed by Connetics' Coordinator and will meet from time to time, at mutually agreeable times and locations but in any event at least two (2) times in each calendar year, to discuss and coordinate the joint promotion and detailing of the Product in the Territory and the strategies and programs that should be developed to maximize sales of the Product. By way of example, the Joint Marketing Team shall develop and implement the Promotion Plan, and guide all continuing joint promotion and detailing efforts with respect to the Product in the Territory. Connetics will have the final responsibility, with the cooperation and assistance of MGI, for developing promotion and detailing strategies with respect to the Product, and for developing promotional and detailing materials. Each party shall bear its own costs associated with its participation in the Joint Marketing Team. Page 4 5 SECTION 3.3. PROMOTION PLAN. From time to time, but in no event less than once a year, the Joint Marketing Team shall develop and formulate a written Promotion Plan for specified periods, which shall set forth promotion and detailing strategies relating to the Product. SECTION 3.4. RECOMMENDATIONS. Each party shall have the right to comment upon and make recommendations to the other party regarding the other party's activities under this Agreement, which recommendations the other party shall thoroughly evaluate and consider, taking into account the other party's expertise and experience with pharmaceutical products in the Territory. SECTION 3.5. DECISIONS. It is expressly understood and agreed that the Joint Marketing Team shall be led by a Connetics' representative with MGI's participation. In the event of a disagreement among the members of the Joint Marketing Team, the matter shall promptly be referred to the Senior Vice President, Commercial Operations of Connetics and the Vice President, Marketing and Sales of MGI for resolution; if the matter is still not resolved, it shall promptly be referred to the Presidents of Connetics and MGI for resolution. If the two Presidents cannot reach agreement, in light of the fact that Connetics owns the Product and the regulatory approvals relating to the Product, Connetics shall have the right to resolve any such disagreement, including without limitation any disagreement regarding the following subjects: (a) promotional material that Connetics considers, in its reasonable judgment, inconsistent with the labeling of the Product or with a regulatory submission pertaining to the Product; (b) communications with the FDA concerning the Product, including but not limited to the reporting of adverse events associated with use of the Product; (c) any decisions regarding programs and financial expenditures; and (d) any proposed recall of the Product. SECTION 3.6. PRICING. Connetics will establish the ex-factory price for the Product. Connetics shall at its sole discretion establish all future factory prices for the Product. Connetics may offer and sell the Product at prices below the established or published ex-factory prices to wholesalers whenever Connetics considers that such pricing is necessary to obtain the business of certain customers. ARTICLE 4 PRODUCT PROMOTION SECTION 4.1. PROMOTION. Subject to Connetics' leadership of the Joint Marketing Team, MGI shall have the obligations set forth in SECTION 2.2 for detailing and promoting the Product in the Territory. Except as set forth in the following sentence, Connetics shall bear all direct costs and expenses incurred by Connetics and MGI in connection with the promotion of the Product in the Territory. Except as otherwise determined by the Joint Marketing Team, MGI shall bear all costs and expense related directly to the MGI Sales Force (e.g., salaries, incentive compensation, bonuses, Page 5 6 benefits, cars, travel and entertainment expenses, etc.) and associated MGI personnel for all purposes, including attending training sessions related to the Product; the cost of any conference facilities etc. reserved in connection with the training of MGI's Sales Force if that training is not held in conjunction with Connetics Sales Force Training; personnel costs of MGI's continuing medical education ("CME") staff; MGI's personnel and travel costs associated with meetings and conventions; and any promotional materials that MGI prepares. Connetics will provide up to $500,000 for marketing and sales support for the Product in the first Year. Thereafter, the amount provided by Connetics for marketing and sales support shall be determined by the Joint Marketing Team. All such amounts for marketing and sales support shall be expended as determined by the Joint Marketing Team in accordance with the Promotion Plan. SECTION 4.2. PROMOTIONAL ACTIVITIES. The Joint Marketing Team shall advise Connetics regarding promotional activities with respect to the Product, which may include, without limitation, the following: journal advertising, direct mail to physicians and pharmacies, advertising agency fees, promotional literature, Sales Force detailing aids, creative and advertising preparation, CME speaker programs (subject to SECTION 4.1), exhibits, symposia, audio- and videocassettes, clinical evaluation programs as agreed upon by the Joint Marketing Team, and marketing support trials (limited to comparative clinical studies against competitive products intended for differentiation of the Product during detailing and promotion). SECTION 4.3. MGI SALES FORCE. Subject to the provisions of Section 4.5, during the Term of this Agreement, MGI shall use its Best Efforts to commit, as of the Effective Date, no fewer than 24 full-time equivalent Representatives to the detailing and promotion of the Product consistent with MGI's obligations under the Promotion Plan. Any variation with respect to MGI's commitment under this Section 4.3 must be approved by the Joint Marketing Team. SECTION 4.4. SALES FORCE VACANCIES. MGI may incur vacancies in its marketing territories relating to the transfer, resignation and/or termination of its Representatives assigned to the detailing and promotion of the Product under this Agreement. MGI shall use Best Efforts to fill any such vacancies soon as possible after such vacancy occurs. No vacancy shall modify the overall obligations of SECTION 4.5. SECTION 4.5. CALL REQUIREMENTS. MGI shall be obligated to use its Best Efforts to deliver detailing and promotion of the Product during seventy-five percent (75%) of the Visits actually made by the MGI Sales Force to MGI Physicians in the Territory. In the event MGI fails to perform its obligations under this SECTION 4.5 such that Connetics has Good Cause to terminate this Agreement, Connetics' remedy shall be limited to the provisions set forth in SECTION 11.4(b). SECTION 4.6. MANAGEMENT OF SALES FORCES. The MGI Sales Force shall be directed by the senior management of MGI, subject to the Promotion Plan developed by the Joint Marketing Team. Connetics shall not have any responsibility for the hiring, firing or compensation of MGI's employees or for any employee costs or benefits associated therewith. SECTION 4.7. PROMOTION ACTIVITY REPORTING. (a) MGI shall provide Connetics with a detailed report within thirty (30) days after the end of each fiscal quarter during the Term of this Agreement, describing the specific Page 6 7 detailing and promotion activities undertaken by its Sales Force during such fiscal quarter. MGI warrants and represents that it will maintain records of Calls made by its Sales Force and that the records will accurately represent the number of Calls made. (b) Connetics shall be entitled to audit the source data and documents that MGI used to compile such reports during normal business hours and at Connetics' expense. Accordingly, during the term of this Agreement and for three (3) years after such records are reported to Connetics pursuant to SECTION 4.7(a), MGI shall maintain such records in sufficient detail to permit Connetics to determine the specific detailing and promotion activities undertaken by its Sales Force during the term of this Agreement. Connetics shall have the right to nominate an independent firm reasonably acceptable to the MGI to verify records of MGI and the calculation of the specific detailing and promotion activities undertaken by its Sales Force under SECTION 4.7(a) of this Agreement during the time period MGI is required to maintain such records hereunder. Such verification shall be conducted during normal business hours, and Connetics shall bear the fees and expenses of the accountants performing such verification. The accountants appointed pursuant to this Section shall not be authorized to disclose to Connetics any information other than the accuracy or inaccuracy of the item(s) to be verified. SECTION 4.8. PROMOTIONAL MATERIALS. Connetics shall create and develop promotional materials relating to the Product for distribution to independent third parties. The Joint Marketing Team will establish the copy platform for all promotional materials and will agree on tactical programs. Subject to the restrictions on trademark usage in ARTICLE 8, MGI may create and develop promotional materials related to the Product using and based on, materials created by or for Connetics; provided, however, that MGI will not publish or distribute any such promotional material (or other material) with respect to the Product that the Joint Marketing Team has not approved. The Joint Marketing team will determine whether the expenses incurred by MGI in creating such materials shall be reimbursed out of the marketing and sales support budget for that year (as referenced in SECTION 4.1). SECTION 4.9. EXCHANGE OF INFORMATION. During the Term of and subject to any other provision of this Agreement, each party will provide the other with any information or summaries of information relevant to the promotion of the Product (including but not limited to market research data, information concerning competitive products, physician communications, and the like) within a reasonable time after such information becomes known to the party. Such information shall be considered confidential or proprietary and therefore subject to SECTION 11.1. SECTION 4.10. TRAINING MATERIALS. Connetics shall train the MGI Sales Force to detail and promote the Product in the Territory commencing on April 11, 1999 in Minneapolis, Minnesota and at such other places to be agreed by the parties. Except as expressly stated herein, MGI shall bear its expenses associated with training its Sales Force. Connetics shall provide MGI with initial Product training materials, as well as any Product training materials developed subsequent to the initial Product training materials, which MGI shall reproduce and distribute to its Sales Force at MGI's own expense. After the Effective Date, the Joint Marketing Team shall develop programs to monitor, test and otherwise ensure that the MGI Sales Force is sufficiently knowledgeable about the Product and other information contained in Connetics' training materials. Page 7 8 ARTICLE 5 CONSIDERATION SECTION 5.1. CONSIDERATION TO MGI. For so long as MGI is conducting detailing and promotion activities pursuant to and in accordance with this Agreement, Connetics shall compensate MGI pursuant to Subsections (a) and (b) below: (a) Connetics will pay to MGI $250,000 per Quarter as follows: (i) Within thirty (30) days after receiving documentation from MGI sufficient to support that MGI made at least 3,750 Calls in the Quarter, Connetics shall pay the $250,000 for that Quarter. (ii) For the second Quarter of 1999, Connetics shall pay MGI $250,000 regardless of the number of Calls that MGI makes during such Quarter, provided that MGI documents the number of Calls it does make in such Quarter. (iii) In any Quarter after the second Quarter of 1999 in which MGI fails to make 3,750 Calls, Connetics shall be entitled to withhold payment for such Quarter, subject to the "cure" mechanism described in paragraph (iv) and (v) below, which is different depending on the number of Quarters that this Agreement has been in effect. (iv) For each of the third and fourth Quarters of 1999 and the first Quarter of 2000, if MGI makes 3,750 Calls in that Quarter, Connetics shall pay MGI $250,000, except that if MGI makes fewer than 3,750 Calls in any such Quarter, and does not make up the shortfall in the following Quarter, then no amount shall be paid in the following Quarter. (v) Beginning with the second Quarter of 2000, the number of Calls made by MGI in each Quarter shall be calculated by averaging the number of Calls made on MGI Physicians over the current and preceding three Quarters, and if the rolling four-Quarter average is less than 3,750 Calls per Quarter, Connetics shall withhold the $250,000 for that Quarter. (b) Connetics will pay to MGI on an annual basis (net of any payments or credit due by MGI under this Agreement): (i) fifty percent (50%) of the Gross Margin on Net Sales of Product equal to or exceeding $7,500,000 in each Year; or (ii) zero percent (0%) of the Gross Margin on Net Sales of Product less than $7,500,000 in each Year. Page 8 9 SECTION 5.2. PAYMENT TERMS. Within thirty (30) days after the close of each Quarter during the Term of this Agreement, Connetics shall submit to MGI an accounting of the Gross Margin on Net Sales of the Product in the Territory and itemizing all deductions under the definitions of Gross Margin and Net Sales for such Quarter and for the Year to date, and calculating the compensation due MGI for such Year under SECTION 5.1(b). At the time of submitting each accounting, Connetics shall submit to MGI all payments due thereunder. SECTION 5.3. AUDIT RIGHTS. During the term of this Agreement and for three (3) years thereafter Connetics shall keep full and accurate financial and accounting records in accordance with U.S. generally accepted accounting principles and shall maintain such records in sufficient detail to permit calculation of the compensation payable to MGI pursuant to SECTION 5.1(b). MGI shall have the right to nominate an independent firm of certified public accountants reasonably acceptable to Connetics to verify the records of Connetics and the calculation of the payment due under SECTION 5.1 of this Agreement. Such verification shall be conducted during normal business hours, and MGI shall bear the fees and expenses of the accountants performing such verification. The accountants appointed pursuant to this Section shall not be authorized to disclose to MGI any information other than the accuracy or inaccuracy of the item(s) to be verified. If the audit reveals that Connetics has over-reported for the period of the audit, MGI shall immediately remit to Connetics any refund due and interest calculated from the payment date on such overpayment at the then-current prime rate. If the audit reveals that Connetics has under-reported for the period of the audit, Connetics shall immediately remit to MGI any balance owing and interest calculated from the date on such overdue amount at the then-current prime rate. In addition, if the audit reveals that Connetics under-reported and underpaid by more than 10%, Connetics shall be responsible for paying the accountants' fees in connection with the audit. ARTICLE 6 MANUFACTURING AND DISTRIBUTION SECTION 6.1. SUPPLY OF PRODUCT. Connetics shall have the sole responsibility, financially and otherwise, for manufacturing the Product, either directly or through one or more contractors (including Affiliates of Connetics), receiving and processing orders, distributing the Product to customers, and handling Product inventory and receivables. Connetics shall bear all costs of such activities, including without limitation all third party royalties (including all payments due to SmithKline Beecham) and cost of goods. Connetics shall use its Best Efforts to insure, but cannot guarantee, that sufficient stock of the Product will be available in its inventory to promptly fill orders from the trade based on reasonable non-binding forecasts to be provided by the Joint Marketing Team at the beginning of each quarter during the Term of this Agreement for that fiscal quarter and the following three (3) fiscal quarters. SECTION 6.2. MONTHLY REPORTING. In order to aid the Joint Marketing Team to provide the forecast to be provided under SECTION 6.1, Connetics within thirty (30) days after the end of a given calendar month (or within a reasonable time after it becomes available) will provide the Coordinators with a written report for that calendar month. This report will set forth, if available, the quantity and dollar amounts of Net Sales and Cost of Goods for the given month, including any deductions taken and corresponding comparisons for the previous year. Page 9 10 SECTION 6.3. ORDERS. If, for any reason, MGI receives orders for the Product, MGI shall forward such orders to Connetics as soon as practicable. SECTION 6.4. FAILURE TO SUPPLY PRODUCT. MGI understands and acknowledges that only one (1) contractor (a party not an Affiliate of Connetics) is currently approved by the FDA to manufacture the Product. If Connetics is at any time unable to supply the Product to be sold under this Agreement, which failure may be due to the failure of a contract manufacturer to meet its obligations to supply Product to Connetics ("Inability to Supply"), such failure will be treated as a force majeure condition under SECTION 11.6; provided, however, (i) MGI's obligations hereunder to promote and detail the Product shall be suspended for the period of such Inability to Supply, and (ii) Connetics shall to pay to MGI $250,000 for any Quarter in which Connetics experiences an Inability to Supply up to a maximum of two consecutive Quarters, notwithstanding any contrary terms in SECTION 5.1(a). ARTICLE 7 REGULATORY AFFAIRS AND MEDICAL INQUIRY SECTION 7.1. FDA APPROVAL. Connetics will maintain ownership of such approval and file any supplements to it. Connetics shall file, own and maintain in its name any and all regulatory and formulary submissions pertaining to the Product and any and all regulatory and formulary approvals that may be issued with respect to the Product. SECTION 7.2. COMPLAINT HANDLING. Connetics shall have the sole right and responsibility, and shall bear all costs related thereto, to take such actions as may be necessary, in accordance with accepted business practices and legal requirements, to obtain and maintain the authorization and/or ability to market the Product in the Territory, including without limitation the following: (a) responding to customer and medical complaints relating to the quality, strength or purity of the Product, and MGI agrees that it shall promptly refer any such complaints that it receives to Connetics; (b) handling all returns of the Product (if the Product is returned to MGI it shall be shipped to Connetics at a location to be provided by Connetics, with any reasonable or authorized shipping or other documented out-of-pocket costs to be paid by Connetics), and MGI and Connetics shall each advise their customers generally that they should make returns to Connetics; and (c) handling all recalls of the Product (at Connetics' request, MGI will assist Connetics in receiving the recalled Product, and any documented out-of-pocket costs incurred by MGI with respect to participating in such recall shall be reimbursed by Connetics). SECTION 7.3. ADVERSE EVENT REPORTING REQUIREMENTS. Connetics shall be solely responsible for submitting Adverse Event Reports to the FDA, except to the extent (if at all) that MGI may be required by law to make such reports itself. During the Term of this Agreement, MGI shall promptly forward to Connetics at the address set forth in SECTION 11.3 any reports MGI Page 10 11 receives of adverse events (distinguished as serious and non-serious by FDA regulations), concerning side effects, injury, toxicity or sensitivity reaction including unexpected increased incidence and severity associated with commercial or clinical uses, studies, investigations or test with the Product (animal or human), throughout the world, whether or not determined to be attributable to the Product. For purposes of this SECTION 7.3, "promptly" means as soon as practicable, but in no event later than (a) five business days for serious adverse events after receipt of complete information regarding such events, or (b) thirty calendar days for non-serious adverse events after receipt of complete information regarding such events. Connetics shall transmit adverse event reports to MGI on a periodic basis, but no less often than once every six (6) months; provided, however, that Connetics shall promptly notify MGI of any adverse event report requiring the cessation or substantial alteration of detailing activities by the MGI Sales Force. MGI shall hold all such communications in the strictest confidence and subject to the terms of SECTION 11.1 of this Agreement. SECTION 7.4. COMMUNICATIONS WITH GOVERNMENT AGENCIES. Connetics shall have the sole right and responsibility and shall bear all costs related to communications with any government agencies to satisfy their requirements regarding the authorization and/or continued authorization to market the Product in commercial quantities in the Territory. MGI shall promptly notify Connetics of any inquiry or other communication that it receives from the FDA concerning the Product. Connetics shall be primarily responsible for all communications with the FDA (and state equivalent agencies) concerning the Product, including but not limited to reporting adverse events and responding to any inquiries concerning advertising, detailing or promotional materials. MGI, however, shall be able to communicate with the any such governmental agency regarding the Product if: (a) such communication is necessary to comply with the terms of this Agreement or the requirements of any law, governmental order or regulation; or (b) MGI, if practical, made a request of such agency to communicate with Connetics instead, and such agency refused such request; provided, however, that before making any communication under this SECTION 7.4, MGI shall give Connetics notice as soon as possible of MGI's intention to make such communications, and Connetics shall be permitted, if practical, to accompany MGI, take part in any such communications and receive copies of all such communications. SECTION 7.5. MEDICAL INQUIRIES. MGI shall refer to Connetics all medical questions or inquiries relating to the Product directed to MGI's Sales Force, except that Adverse Event Reports shall be handled as set forth in SECTION 7.3. MGI's medical inquiry personnel shall instruct individuals who contact MGI or MGI's Sales Force to direct medical inquiries directly to Connetics. SECTION 7.6. POST-MARKET STUDIES. Connetics shall be responsible for, and bear the cost of, conducting any clinical study required by the FDA to maintain the NDA for the Product or establish any new indication or dosage form of the Product. MGI shall not conduct any clinical study nor incur any expenses in anticipation of conducting any such study. The cost of any such study conducted by Connetics shall not be considered advertising, detailing or promotional expenses for purposes of this Agreement. Conversely, the cost of clinical evaluation programs and marketing support trials meeting the requirement of SECTION 4.2 shall be considered promotional expenses for purposes of this Agreement. Page 11 12 ARTICLE 8 INTELLECTUAL PROPERTY SECTION 8.1. TRADEMARK LICENSE. Connetics hereby grants to MGI a non-exclusive, royalty-free license to use the following trademarks for the advertising, promotion, marketing, distribution and sale of Product in the Territory: Ridaura(R) Connetics (name and logo) c-globe design (logo) In using the trademarks in materials it generates, MGI shall display the marks in a style or size of print distinguishing the mark from any accompanying wording or text. SECTION 8.2. MARKING. During the Term of this Agreement and if permitted by FDA regulations, all advertising, detailing and promotional materials related to the Product may include both Connetics' name and logo and MGI's name and logo in a manner approved by the Joint Marketing Team. Neither party will acquire any rights in the other party's name or logo on account of its use in advertising, detailing and promotional materials for the Product. Nothing in this Agreement shall be construed to give either party any rights to use the other party's name or logo outside of the Territory or other than in accordance with this Agreement. Neither party shall distribute information that bears the name of the other party unless the information meets the requirements of this Section, or the other party has consented in writing to the use of its name on the information, except that MGI shall be permitted to distribute and use all materials (in any form) provided or previously approved by Connetics or the Joint Marketing Committee. SECTION 8.3. OWNERSHIP. All proprietary features constituting the trade dress of the Product, including but not limited to the shape and color of the bottle, cap, label design, the size and configuration of the units in cartons, etc., shall belong exclusively to Connetics. Except as expressly set forth in this SECTION 8.3, Connetics shall own all copyrights to all advertising, detailing, promotional and training materials as well as all other written materials, audiotapes, videotapes, or other copyrightable materials that are created during the Term of this Agreement in connection with the advertising, detailing, marketing and promotion of the Product, and MGI will and does waive all rights in and to any and all such materials. To the extent necessary, Connetics will contract with, and make all arrangements with, any and all third parties for the creation of any such materials. Connetics shall, and does hereby, grant to MGI a royalty-free license to use and reproduce such materials solely in conjunction with its performance of services pursuant to this Agreement, which license MGI shall not assign or transfer. Any copyrights on promotional and training materials made by or on behalf of MGI and funded solely by MGI shall be owned by MGI. MGI hereby grants to Connetics a perpetual, non-exclusive, royalty-free license under such copyrights to reproduce, use and sell such promotional and training material. Page 12 13 ARTICLE 9 REPRESENTATIONS AND WARRANTIES SECTION 9.1. REPRESENTATIONS AND WARRANTIES OF CONNETICS. Connetics hereby represents and warrants to MGI as follows: (a) Connetics has the corporate power and authority to execute and deliver this Agreement and to perform its obligations thereunder, and the execution, delivery and performance of this Agreement have been duly authorized by Connetics. (b) Connetics has the right to grant to MGI the rights and licenses granted under this Agreement. (c) To the best of Connetics' knowledge, there are no pending or threatened legal claims relating to the Product, and there is no infringement or threatened infringement of a third party's patent rights with respect to any use or sale of Product in the Territory. SECTION 9.2. REPRESENTATION AND WARRANTY OF MGI. MGI hereby represents and warrants to Connetics that MGI has the corporate power and authority to execute and deliver this Agreement and to perform its obligations thereunder, and the execution, delivery and performance of the Agreement have been duly authorized by MGI. SECTION 9.3. DISCLAIMER OF WARRANTIES. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, CONNETICS MAKES NO WARRANTY WITH RESPECT TO ANY TECHNOLOGY, GOODS, SERVICES, RIGHTS, OR OTHER SUBJECT MATTER OF THIS AGREEMENT AND HEREBY DISCLAIMS ALL WARRANTIES, CONDITIONS OR REPRESENTATIONS OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF PERFORMANCE, MERCHANTABILITY, SATISFACTORY QUALITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS. SECTION 9.4. DISCLAIMER OF MGI. Connetics acknowledges that MGI disclaims any warranty, representation or guarantee that MGI's promotion and detailing of the Product as permitted hereunder will generate any particular level of actual prescriptions, or any increase in sales of the Product, as a result of Calls or Visits made to MGI Physicians. ARTICLE 10 INDEMNIFICATION SECTION 10.1. CONNETICS INDEMNITY. (a) Connetics agrees to indemnify and hold harmless MGI, its Affiliates, and their respective officers, directors, employees and agents from and against any and all damages, claims, liabilities, demands, charges, suits, penalties, costs, expenses and obligations to third parties incurred or arising in connection with (i) the manufacture, advertising, promotion, sale, import or use of the Product, including without Page 13 14 limitation, product liability and intellectual property infringement claims, or (ii) breach of any warranty, representation or covenant of Connetics contained in this Agreement; provided, however, Connetics' obligations to indemnify MGI in any action related to a claim that the Product infringes the intellectual property of a third party shall be limited to the amount of actual damages awarded to such third party by a court or arbitrator, as the case may be, and to the reasonable costs and expenses (including reasonable attorney's fees) of MGI, its Affiliates, and their respective officers, directors, employees and agents in connection with such action. Connetics shall have no indemnification obligation under this SECTION 10.1(A) for any claim(s) arising from (a) any modifications to the Product by MGI where liability would not have occurred by for such modifications or (b) the negligence or wrongful act of MGI, its officers, agents or employees, including without limitation (i) the detailing and/or promotion of the Product in a manner that is inconsistent with the FDA approval pertaining to the Product, or (ii) representation or statement regarding the Product which is inconsistent with the specifications or product label claims by MGI or an Affiliate, assignee, distributor or representative of MGI. (b) MGI shall give Connetics prompt written notice of the receipt of any claim or the commencement of any action, suit or proceeding for which MGI may seek indemnification under SECTION 10.1(a) (individually or collectively, referred to hereafter as an "Action"), and Connetics shall assume the defense of the Action; provided that, MGI complies with any good faith request made by Connetics for assistance in such defense; and provided further that: (i) MGI shall have the right at any time to participate in any such Action with counsel of its own choice at MGI's sole expense; (ii) if MGI elects for Connetics to defend the Action, then MGI's counsel may participate in all discussions, but shall not be entitled to appear in any legal or judicial proceeding relating to the Action; (iii) if Connetics fails to assume the defense within a reasonable time, MGI may assume such defense, and the reasonable fees and expenses of MGI's attorneys will be covered by the indemnity provided for in Section 10.1; and (iv) if a conflict with respect to legal representation arises which cannot be resolved, and MGI is not prepared to waive such conflict, then MGI shall have the right to obtain separate legal counsel at Connetics' expense; provided, however, Connetics shall have no obligation to pay MGI's expenses in connection with MGI obtaining separate legal counsel in any Action brought by Connetics against MGI or any Action brought by MGI against Connetics. Nothing in the foregoing discussion shall give either party the right or authority to settle any Action on behalf of the other party without the other party's written consent. (b) LIMITATION OF LIABILITY. EXCEPT FOR (A) ANY LOSS, LIABILITY, DAMAGE OR OBLIGATION ARISING OUT OF OR RELATING TO THE Page 14 15 DISCLOSURE OF CONFIDENTIAL INFORMATION PURSUANT TO SECTION 11.1 OR (B) THE INDEMNITY OBLIGATIONS OF CONNETICS SET FORTH IN SECTION 10.1 (EXCLUDING INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS), OR AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, IN NO EVENT SHALL EITHER PARTY HAVE ANY LIABILITY TO THE OTHER PARTY OR ANY OTHER THIRD PARTY FOR ANY LOST OPPORTUNITY OR PROFITS, COSTS OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES, OR FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES ARISING OUT OF THIS AGREEMENT, UNDER ANY CAUSE OF ACTION OR THEORY OF LIABILITY (INCLUDING NEGLIGENCE), AND WHETHER OR NOT SUCH PARTY TO THIS AGREEMENT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. SECTION 10.2. MGI INDEMNITY. (a) MGI agrees to indemnify and hold harmless Connetics, its Affiliates, and their respective officers, directors, employees and agents from and against any and all damages, claims, liabilities, demands, charges, suits, penalties, costs, expenses and obligations to third parties arising from the negligence or wrongful act of MGI, its officers, agents or employees, including without limitation the detailing and/or promotion of the Product in a manner that is inconsistent with the FDA approval pertaining to the Product. (b) Connetics shall give prompt written notice of the receipt of any claim or the commencement of any action, suit or proceeding for which Connetics may seek indemnification under SECTION 10.2(a), and MGI shall assume the defense thereof; provided, however, that Connetics shall be entitled to participate in any such action, suit or proceeding with counsel of its own choice, but at its own expense. If MGI fails to assume the defense within a reasonable time, Connetics may assume such defense, and the reasonable fees and expenses of its attorneys will be covered by the indemnity provided for in SECTION 10.2. No such claim, action, suit or proceeding shall be compromised or settled in any manner that might adversely affect the interests of MGI without the prior written consent of MGI. SECTION 10.3. INDEMNITY DISPUTES. In the event that both parties claim indemnification for the same claim, action, suit or proceeding, the provisions of SECTIONS 10.1 and 10.2 shall apply, except that the cost of defense shall be shared equally pending final resolution, at which time the party found to be entitled to indemnification shall also be entitled to reimbursement for any amount paid by it as defense costs, in addition to other amounts recoverable under SECTIONS 10.1 AND 10.2, as the case may be. Page 15 16 ARTICLE 11 GENERAL TERMS AND CONDITIONS SECTION 11.1. CONFIDENTIALITY. (a) In order to facilitate this Agreement it will be necessary for the parties to exchange certain Proprietary Information. Each party agrees to retain the Proprietary Information of the other party in strict confidence and not to disclose or transfer the Proprietary Information to any party or use the Proprietary Information other than as authorized by the terms of this Agreement or otherwise in writing by the discloser. The parties acknowledge that such Proprietary Information can constitute "inside information" for securities purposes and the responsibility to refrain from any unauthorized disclosure, trading or other such use. Each party represents to the other that it maintains policies and procedures designed to prevent unauthorized disclosure of its own Proprietary Information. All employees of a party performing services under this Agreement shall be subject to agreements prohibiting the disclosure of Proprietary Information except on the terms permitted in this Agreement. (b) These obligations of confidentiality and non-use shall not apply to Proprietary Information: (a) that was previously known to the recipient as evidenced by recipient's written records, (b) that is lawfully obtained by recipient from a source independent of the disclosing party, (c) that is now or becomes public knowledge other than by breach of this Agreement, or (d) that is legally required to be disclosed under federal or state law, provided that the party or its Affiliate required to make the disclosure takes reasonable steps, consistent with protection it would seek for its own confidential information, to prevent the Proprietary Information from becoming public. (c) Each party shall have the right to disclose the Proprietary Information of the other to those of its Affiliates that need the Proprietary Information for the purposes of this Agreement, provided that each such Affiliate agrees to be bound to the other party by the provisions of this ARTICLE 11 and the disclosing party guarantees the performance under this Agreement of any such Affiliate. (d) These obligations of confidentiality and non-use shall survive the expiration or termination of this Agreement. SECTION 11.2. ARBITRATION AND APPLICABLE LAW. Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach or termination of this Agreement, shall be settled by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction. In any arbitration pursuant to this SECTION 11.2, the award shall be rendered by a majority of the members of a board of arbitration consisting of three members, one being appointed by each party and the third being appointed by mutual agreement of the two arbitrators appointed by the parties. The place of arbitration shall be Chicago, Illinois. The arbitrators shall apply the law of the State of New York (regardless of that jurisdiction's or any other jurisdiction's choice of law principles). Page 16 17 SECTION 11.3. NOTICES. Any notice required or permitted by the terms of this Agreement shall be given by overnight carrier, or by registered mail, prepaid and properly addressed, or delivered by hand, If to Connetics, to: 3400 West Bayshore Road Palo Alto, California 94303 Attn.: President and Chief Executive Officer And if to MGI, to: Suite 300 E, Opus Center 9900 Bren Road East Minnetonka, MN 55343-9667 Attn.: President and Chief Executive Officer or at such other address as either party may designate by notice pursuant to this Section. Any such notice shall be deemed to have been given when received. SECTION 11.4. TERM AND TERMINATION. (a) Term. The term of this Agreement shall begin on the Effective Date and shall continue, unless terminated sooner in accordance with this Agreement, until the second (2nd) anniversary of the Effective Date. (b) Termination for Good Cause. Either party may terminate this Agreement for Good Cause effective at any time after providing sixty (60) days written notice and an opportunity to cure during such sixty (60) day period; provided, however, that either party shall have the right to terminate this Agreement immediately upon written notice to the other party if an Inability to Supply has continued for six (6) months or more. If a cure is effected, the notice with respect to such Good Cause shall be null and void. (c) Termination by Either Party. Either party shall have the right to terminate this Agreement upon six (6) months written notice to the other party commencing upon the first anniversary of the Effective Date. (d) Termination for Other Reasons. Either party shall have the right to terminate this Agreement in the event of a large scale recall or withdrawal of the Product from the Territory resulting from a significant safety risk inherent in the Product and not due to tampering, a remediable manufacturing problem, or other defect that can be cured with respect to Product manufactured after such risk is discovered. Termination of this Agreement shall be without prejudice to (i) any remedies that any party may then or thereafter have under this Agreement or at law; (ii) a party's right to receive any payment accrued under the Agreement prior to the termination date but which became payable thereafter; or (iii) either party's right to obtain performance of any Page 17 18 obligation provided for in this Agreement that survives termination by its terms or by a fair interpretation of this Agreement. (e) Effect of Termination. Unless otherwise explicitly stated in this Agreement, MGI shall not be entitled to compensation for sales of Product after termination of this Agreement. If either party terminates this Agreement for Good Cause, Connetics shall pay to MGI all of the compensation due MGI under SECTION 5.1 (up to and including any portion of the calendar month in which effective termination occurs, including sums that have accrued but have not yet been paid as of the effective date of termination). SECTION 11.5. ANNOUNCEMENTS/PUBLICITY. Subject to the requirements of law and/or Nasdaq, any announcements or publicity to be made or given in respect of this Agreement by either party shall be subject to the prior approval of the other party (such approval not to be unreasonably withheld or delayed) where such announcement or publicity refers to such other party. SECTION 11.6. FORCE MAJEURE. Neither party shall be liable for failure to perform any duty or obligation that party may have under this Agreement where such failure has been occasioned by any force majeure which shall mean and include government regulation, fire, flood, war, public disaster, strike or labor dispute, inevitable accident, national emergency, or any other cause outside the reasonable control of the party having the duty so to perform. Such failure to perform shall only be excusable under the provisions of this Section for so long as, and to the extent that, the same is rendered impossible by force majeure. The party claiming that force majeure has occurred shall send to the other party within five (5) working days of the first occurrence of force majeure full particulars including the date of first occurrence and of the cause or event giving rise to it. Notwithstanding the relief granted to any party by this Section, the relevant party shall nevertheless use its reasonable endeavors in any situation where it has invoked this Section to perform its relevant obligations as soon as possible after force majeure has ceased. If a force majeure event lasts longer than six (6) months, the unaffected party shall have, in addition to the right to terminate this Agreement for Good Cause under SECTION 11.4, the optional right to continue the Agreement in full force and effect without modification. SECTION 11.7. ASSIGNMENT. Unless otherwise agreed this Agreement may not be assigned by either of the parties, except in the case of a merger or sale of all the assets of the business to which this Agreement relates. SECTION 11.8. SURVIVAL. The covenants and agreements set forth in SECTION 4.7(b) and 5.3 and ARTICLES 9, 10 and 11 shall survive any termination or expiration of this Agreement and remain in full force and effect regardless of the cause of termination. SECTION 11.9. NONWAIVER OF RIGHTS. No failure or delay on the part of a party in exercising any right hereunder will operate as a waiver of, or impair, any such right. No single or partial exercise of any such right will preclude any other or further exercise thereof or the exercise of any other right. No waiver of any such right will be deemed a waiver of any other right hereunder. SECTION 11.10. HEADINGS. Section headings contained in this Agreement are included for convenience only and form no part of the agreement between the parties. Page 18 19 SECTION 11.11. VALIDITY OF PROVISIONS AND SEVERABILITY. If any provision of this Agreement is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction: such provision will be deemed amended to conform to applicable laws of such jurisdiction so as to be valid and enforceable, or, if it cannot be so amended without materially altering the intention of the parties, it will be stricken; the validity, legality and enforceability of such provision will not in any way be affected or impaired thereby in any other jurisdiction; and the remainder of this Agreement will remain in full force and effect. SECTION 11.12. NO HIRE. During the term of this Agreement and for six (6) months thereafter, neither party nor its Affiliates shall solicit nor hire any individual in the other party's Sales Force without such party's prior written consent which consent such party may grant in its sole discretion. SECTION 11.13. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties with respect to the subject matter hereof. This Agreement may not be modified except by a writing signed by the parties' authorized representatives. [REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] Page 19 20 IN WITNESS WHEREOF, the parties have entered into this Agreement as of the Effective Date. Connetics Corporation, MGI Pharma, Inc. a Delaware corporation By /s/ T. Wiggans By /s/ C. N. Blitzer ----------------------------------- ----------------------------------- Thomas G. Wiggans Charles N. Blitzer President & Chief Executive Officer President & Chief Executive Officer Page 20 EX-10.2 3 CO-PROMOTION AGREEMENT EFFECTIVE AS OF 4/1/1999 1 EXHIBIT 10.2 CO-PROMOTION AGREEMENT THIS CO-PROMOTION AGREEMENT is effective as of April 1, 1999 by and between Connetics Corporation ("Connetics") and MGI Pharma, Inc. ("MGI"). B A C K G R O U N D A. Connetics has marketing rights in the United States to a pharmaceutical product known as Luxiq(TM). B. MGI has experience and expertise in the marketing of products to rheumatologists and internal medicine practitioners. C. MGI has a professional sales force that calls on physicians and other health care professionals in order to promote MGI products. D. Connetics desires to enhance its marketing of Luxiq(TM) in the United States by enlisting the support and participation of MGI and the MGI Sales Force (as defined below) in the marketing effort. NOW, THEREFORE, in consideration of the Background and the mutual promises contained in this Agreement, Connetics and MGI agree as follows: A G R E E M E N T ARTICLE 1 DEFINITIONS "AFFILIATE" means in respect of either party any corporation or business entity controlled by, controlling, or under common control with Connetics or MGI, respectively. For this purpose "control" means the direct or indirect beneficial ownership of at least fifty percent (50%) of the voting stock of, or at least fifty percent (50%) interest in the income of, such corporation or other business entity, or such other relationship as, in fact, constitutes actual control. "BEST EFFORTS" means those efforts that would be made by a reasonably prudent business person acting in good faith in the exercise of reasonable commercial judgment. "CALL" means a presentation of the Product by a professional sales representative to a physician or other health care professional or organization licensed to administer, dispense or prescribe prescription drugs during a visit which is for the purpose of actively promoting the sale of the Product. "COORDINATOR" means the person appointed by each of Connetics and MGI in accordance with SECTION 3.1. 2 "COST OF GOODS" shall mean shall mean the cost of Product manufactured in final form by or on behalf of Connetics, including without limitation, all direct and indirect costs for material, labor and production overhead included in manufacturing, producing and supplying Product in the Territory, royalties paid to third parties, distribution costs, and freight and other transportation costs, including insurance charges, and duties, tariffs, sales and excise taxes and other governmental charges based directly on sales turnover or delivery of such Product and actually paid and allowed by Connetics, all calculated in accordance with U.S. generally accepted accounting principles. "DERMATOLOGIST" shall mean all physicians specializing in dermatology as defined by mutually acceptable criteria and reported by a mutually acceptable reporting service. "EFFECTIVE DATE" means the date first written above. "FDA" means the United States Food and Drug Administration. "GOOD CAUSE" means (a) the material failure of the other party to comply with its material obligations contained in this Agreement. Material obligations include, without limitation, the failure of MGI to provide the full level of detailing and promotional support required by ARTICLES 2 AND 4, or the failure of Connetics to make the payments required by SECTION 5.1, (b) the filing of a petition by or against the other party under any bankruptcy, insolvency or similar law (which petition is not dismissed within sixty (60) days after filing); the appointment of a receiver for the other party's business or property; or the other party's making of a general assignment for the benefit of its creditors, or (c) any force majeure event as defined in SECTION 11.6 affecting the other party beyond the other party's control that lasts for a period of at least six (6) months and which is of sufficient intensity to interrupt or prevent the carrying out of the totality of such other party's material obligations under this Agreement during such period. "GROSS MARGIN" means Net Sales less Cost of Goods. "INTERNAL MEDICINE PHYSICIANS" shall mean all physicians specializing in internal medicine as defined by mutually acceptable criteria and reported by a mutually acceptable reporting service. "JOINT MARKETING TEAM" means the committee appointed pursuant to SECTION 3.2 of this Agreement. "LAUNCH STOCKING" means the Net Sales of Product sold by Connetics under its Launch Stocking Incentive Program. "LAUNCH STOCKING INCENTIVE PROGRAM" means Connetics' offer to wholesalers of special purchase terms on all Product ordered on or before April 30, 1999. "LUXIQ PRESCRIPTIONS" shall mean prescriptions for the Product as determined using data from an agreed upon service provider. "MARKETING EXPENSES" shall mean all out-of-pocket expenses in connection with the Product that are approved by the Joint Marketing Team and are (i) incurred by Connetics for marketing and promotional materials and activities produced by Connetics, or (ii) incurred by MGI 3 for marketing and promotional materials and activities produced by MGI, except as set forth in SECTION 4.1. "MGI PHYSICIANS" means rheumatologists and internal medicine practitioners with a rheumatology sub-specialty as defined by mutually acceptable criteria and reported by a mutually acceptable reporting service. "NDA" means Connetics' new drug application number 20-934 submitted to the FDA on December 16, 1997 (a summary of which has been provided to MGI). "NET SALES" shall mean the gross amounts invoiced by Connetics for Product in the Territory in accordance with U.S. generally accepted accounting principles (except Launch Stocking), less the following amounts directly chargeable to such Products: (a) customary trade, quantity or cash discounts and rebates, actually allowed and taken; (b) allowances for estimated returns, rebates and chargebacks; (c) uncollectible amounts; and (d) recalls. "PRODUCT" means the betamethasone valerate foam product, trade name Luxiq (TM), as described in the product specifications of the NDA as it may be amended from time to time including any improvements thereto. "PRODUCT CONTRIBUTION" means the amount calculated, on a quarterly basis, by application of the following formula: [*]. "PRODUCT INFORMATION" means the dossier, regulatory status and information, data and results of clinical and other trials and investigations relating to the Product, including the NDA and right of cross-reference to the NDA, together with all other information relating to the specification of the Product and information relating to the manufacture (including method, conditions, and process equipment), testing (including quality control standards, assay methods and stability studies), storage and use of the Product now or hereafter during the term of this Agreement in the possession or under the control of Connetics. "PROMOTION PLAN" means a plan developed by the Joint Marketing Team for the detailing and promotion of the Product in the Territory, and shall include promotional strategies, detailing plans, pricing and budgets for promotional activities (including the development of materials for the detailing and promotion of the Product) for each discrete detailing period in which MGI participates during the Term of this Agreement. "PROPRIETARY INFORMATION" means any information of value of either party, not generally known to the public, including (but not limited to): (a) the Product Information; the development status of the Product; Product indications and modes of administration; technical information, such as clinical, biological, manufacturing, pharmaceutical and characterizing data; and know-how; *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 4 (b) business information, such as reports; records; customer lists; supplier lists; marketing and sales plans; financial information; costs; and pricing information; and (c) pharmacoeconomic analyses, if any, conducted by Connetics with respect to the Product. "REPRESENTATIVES" means sales representatives employed by MGI for detailing the Product in the Territory as permitted hereunder. "SALES FORCE" means all of the Representatives employed by Connetics or MGI, as the case may be. "TERRITORY" means the United States of America, including its territories and possessions. "YEAR" means the period beginning with a given anniversary of the Effective Date and ending at the end of the day before the next anniversary of that date. ARTICLE 2 GRANTS AND OBLIGATIONS SECTION 2.1. GRANT TO MGI. Connetics hereby grants to MGI, during the Term of this Agreement, the (i) exclusive right to detail and promote the Product in the Territory to MGI Physicians, and (ii) the non-exclusive right to detail and promote the Product in the Territory to Internal Medicine Physicians other than MGI Physicians. During the Term of this Agreement, neither Connetics nor an Affiliate of Connetics will authorize, or grant the right to, any third party the rights to co-detail, co-promote, or co-market the Product to MGI Physicians in the Territory as are granted to MGI hereunder, without MGI's prior written consent which may be granted in MGI's sole discretion. SECTION 2.2. MGI'S OBLIGATIONS. Subject to the provisions of and during the Term of this Agreement, MGI shall use its Best Efforts to detail and promote the Product in the Territory to MGI Physicians according to the Promotion Plan and in such manner and with such expedition as MGI itself would have adopted in detailing and promoting a product of its (or any of its Affiliates) own invention, including but not limited to the use of its trained and qualified Sales Force to make Calls on physicians and other persons and organizations licensed to administer, dispense and prescribe prescription drugs with respect to the Product. Subject to the obligations set forth in SECTION 2.3 and ARTICLE 4, and in particular SECTION 4.3, nothing in this Agreement is intended to prevent MGI from marketing and/or promoting other products during the term of this Agreement or thereafter. SECTION 2.3. COMPETITION. During the term of this Agreement, MGI will not promote any other topical corticosteroid products that competes with the Product to MGI Physicians. Nothing in this Agreement shall restrict Connetics from engaging in commercial alliances for Product with other parties for sales promotion to physicians other than MGI Physicians. 5 ARTICLE 3 GOVERNANCE SECTION 3.1. COORDINATOR. Connetics and MGI shall each appoint an authorized and knowledgeable representative ("Coordinator") to direct communications. Each party will promptly notify the other as to the name of the individual so appointed. Each party may replace its Coordinator at any time, upon prompt written notice to the other party. SECTION 3.2. JOINT MARKETING TEAM. Within thirty (30) days following the Effective Date, the Coordinators shall establish a "Joint Marketing Team" consisting of representatives of Connetics and representatives of MGI appointed by the respective Chief Executive Officers of each party. The Joint Marketing Team will be directed by Connetics' Coordinator and will meet from time to time, at mutually agreeable times and locations but in any event at least two (2) times in each calendar year, to discuss and coordinate the joint promotion and detailing of the Product in the Territory and the strategies and programs that should be developed to maximize sales of the Product. By way of example, the Joint Marketing Team shall develop and implement the Promotion Plan, and guide all continuing joint promotion and detailing efforts with respect to the Product in the Territory. Connetics will have the final responsibility, with the cooperation and assistance of MGI, for developing promotion and detailing strategies with respect to the Product, and for developing promotional and detailing materials. Each party shall bear its own costs associated with its participation in the Joint Marketing Team. SECTION 3.3. PROMOTION PLAN. From time to time, but in no event less than once a year, the Joint Marketing Team shall develop and formulate a written Promotion Plan for specified periods, which shall set forth promotion and detailing strategies relating to the Product. SECTION 3.4. RECOMMENDATIONS. Each party shall have the right to comment upon and make recommendations to the other party regarding the other party's activities under this Agreement, which recommendations the other party shall thoroughly evaluate and consider, taking into account the other party's expertise and experience with pharmaceutical products in the Territory. SECTION 3.5. DECISIONS. It is expressly understood and agreed that the Joint Marketing Team shall be led by a Connetics' representative with MGI's participation. In the event of a disagreement among the members of the Joint Marketing Team, the matter shall promptly be referred to the Senior Vice President, Commercial Operations of Connetics and the Vice President, Marketing and Sales of MGI for resolution; if the matter is still not resolved, it shall promptly be referred to the Presidents of Connetics and MGI for resolution. If the two Presidents cannot reach agreement, in light of the fact that Connetics owns the Product and the regulatory approvals relating to the Product, Connetics shall have the right to resolve any such disagreement, including without limitation any disagreement regarding the following subjects: (a) promotional material that Connetics considers, in its reasonable judgment, inconsistent with the labeling of the Product or with a regulatory submission pertaining to the Product; (b) promotional material and other promotional activities that Connetics regards, in its reasonable judgments, as adversely affecting Connetics' promotion and/or marketing 6 of the Product in other countries; (c) communications with the FDA concerning the Product, including but not limited to the reporting of adverse events associated with use of the Product; (d) any decisions regarding programs and financial expenditures; and (e) any proposed recall of the Product. SECTION 3.6. PRICING. Connetics will establish the initial ex-factory prices for the Product. Connetics shall at its sole discretion establish all future ex-factory prices for the Product. Connetics may offer and sell the Product at prices below the established or published ex-factory prices to wholesalers whenever Connetics considers that such pricing is necessary to obtain the business of certain customers. ARTICLE 4 PRODUCT PROMOTION SECTION 4.1. JOINT PROMOTION. Subject to Connetics' leadership of the Joint Marketing Team, MGI shall have the obligations set forth in SECTION 2.2 for detailing and promoting the Product in the Territory. Except as otherwise determined by the Joint Marketing Team, MGI shall bear all costs and expense related directly to the MGI Sales Force (e.g., salaries, incentive compensation, bonuses, benefits, cars, travel and entertainment expenses, etc.) and associated MGI personnel for all purposes, including attending training sessions related to the Product; the cost of any conference facilities etc. reserved in connection with the training of MGI's Sales Force if that training is not held in conjunction with Connetics Sales Force Training; personnel costs of MGI's continuing medical education ("CME") staff; MGI's personnel and travel costs associated with meetings and conventions; and any promotional materials that MGI prepares. Connetics shall supply to MGI, at Connetics' cost, tradepacks, placebos and other materials which may be deemed part of the Marketing Expenses. The Joint Marketing Team will determine the scope and nature of the Marketing Expenses. SECTION 4.2. PROMOTIONAL ACTIVITIES. The Joint Marketing Team shall advise Connetics regarding promotional activities with respect to the Product, which may include, without limitation, the following: journal advertising, direct mail to physicians and pharmacies, advertising agency fees, promotional literature, Sales Force detailing aids, creative and advertising preparation, CME speaker programs (subject to SECTION 4.1), exhibits, symposia, audio- and videocassettes, clinical evaluation programs as agreed upon by the Joint Marketing Team, and marketing support trials (limited to comparative clinical studies against competitive products intended for differentiation of the Product during detailing and promotion). SECTION 4.3. CALL REQUIREMENT. MGI shall detail and promote the Product at its discretion using the MGI Sales Force in the Territory pursuant to a plan approved by the Joint Marketing Team. SECTION 4.4. MANAGEMENT OF SALES FORCES. The MGI Sales Force shall be directed by the senior management of MGI, subject to the Promotion Plan developed by the Joint Marketing 7 Team. Connetics shall not have any responsibility for the hiring, firing or compensation of the MGI's employees or for any employee costs or benefits associated therewith. SECTION 4.5. PROMOTION ACTIVITY REPORTING. (a) MGI shall provide Connetics with a detailed report within thirty (30) days after the end of each fiscal quarter during the Term of this Agreement, describing the specific detailing and promotion activities undertaken by its Sales Force during such fiscal quarter. MGI warrants and represents that it will maintain records of Calls made by its Sales Force and that the records will accurately represent the number of Calls made. (b) Connetics shall be entitled to audit the source data and documents that MGI used to compile such reports during normal business hours and at Connetics' expense. Accordingly, during the term of this Agreement and for three (3) years after such records are reported to Connetics pursuant to SECTION 4.5(a), MGI shall maintain such records in sufficient detail to permit Connetics to determine the specific detailing and promotion activities undertaken by its Sales Force during such term, and the amount allocated to Marketing Expenses under this Agreement. Connetics shall have the right to nominate an independent firm reasonably acceptable to the MGI to verify records of MGI and the calculation of the specific detailing and promotion activities undertaken by its Sales Force under SECTION 4.5(a) of this Agreement during the time period MGI is required to maintain such records hereunder. Such verification shall be conducted during normal business hours, and Connetics shall bear the fees and expenses of the accountants performing such verification. The accountants appointed pursuant to this Section shall not be authorized to disclose to Connetics any information other than the accuracy or inaccuracy of the item(s) to be verified. SECTION 4.6. PROMOTIONAL MATERIALS. Connetics shall create and develop promotional materials relating to the Product for distribution to independent third parties. The Joint Marketing Team will establish the copy platform for all promotional materials and will agree on tactical programs. Subject to the restrictions on trademark usage set forth in ARTICLE 8, MGI may create and develop promotional materials related to the Product using, and based on, materials created by or for Connetics; provided, however, MGI will not, publish or distribute any such promotional material (or other material) with respect to the Product that the Joint Marketing Team has not approved. The Joint Marketing Team will determine whether the expenses incurred by MGI in creating such promotional materials shall be included in Marketing Expenses. SECTION 4.7. EXCHANGE OF INFORMATION. During the Term of and subject to any other provision of this Agreement, each party will provide the other with any information or summaries of information relevant to the promotion of the Product (including but not limited to market research data, information concerning competitive products, physician communications, and the like) within a reasonable time after such information becomes known to the party. Such information shall be considered confidential or proprietary and therefore subject to SECTION 11.1. SECTION 4.8. TRAINING MATERIALS. Connetics shall train the MGI Sales Force as required to detail and promote the Product in the Territory according to the terms of this Agreement through existing in-house staff and field clinical liaisons, including a training program commencing on April 11, 1999 in Minneapolis, Minnesota, or at such other time and place to be agreed by the parties. 8 Except as otherwise provided herein, each party shall bear the expenses associated with training its Sales Force. Connetics shall provide MGI with initial Product training materials, as well as any Product training materials developed subsequent to the initial Product training materials, which MGI shall reproduce and distribute to its Sales Force at MGI's own expense. The Joint Marketing Team shall develop programs to monitor, test and otherwise ensure that the Connetics and MGI Sales Forces are sufficiently knowledgeable about the Product and other information contained in Connetics' training materials. SECTION 4.9. SAMPLING. (a) In developing the Promotion Plan to achieve the objectives of this Agreement, the Joint Marketing Team will consider whether and to what extent it is necessary to distribute the Product to health care personnel and the trade as trade packs or samples (e.g., starter or trial kits). If the Joint Marketing Team determines that sales of the Product would be enhanced by distributing such samples, Connetics shall provide to MGI a percentage of available samples of the Product, to be distributed by the MGI Sales Force, in accordance with the Promotion Plan. (b) MGI shall keep records as required by the FDA or any other governmental authority with regard to all samples distributed by its Sales Force. ARTICLE 5 CONSIDERATION SECTION 5.1. CONSIDERATION TO MGI. Connetics shall book all sales of Product in the Territory and, for so long as MGI is conducting detailing and promotion activities pursuant to and in accordance with this Agreement, shall pay to MGI [*] percent [*] of the Product Contribution, calculated on a quarterly basis. SECTION 5.2. PAYMENT TERMS. (a) Within forty-five (45) days after the close of each fiscal quarter during the Term of this Agreement (or, if later, fifteen (15) days after Connetics receives the report from the reporting service for that quarter) Connetics shall submit to MGI an accounting of the Product Contribution in the Territory, including an itemization of all elements of Product Contribution for such fiscal quarter and calculating the compensation due MGI for such fiscal Quarter under SECTION 5.1. At the time of submitting each accounting, Connetics shall submit to MGI all payments due thereunder net of any credits of amounts owed by MGI to Connetics. (b) Within thirty (30) days of December 31, 1999, Connetics shall pay to MGI a one time adjustment for Launch Stocking which payment shall be the amount calculated according to the following formula: [*]. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 9 SECTION 5.3. AUDIT RIGHTS. During the term of this Agreement and for three (3) years thereafter Connetics shall keep full and accurate financial and accounting records in accordance with U.S. generally accepted accounting principles and shall maintain such records in sufficient detail to permit calculation of Net Sales, Cost of Goods and Product Contribution. MGI shall have the right to nominate an independent firm of certified public accountants reasonably acceptable to the Connetics to verify the records of Connetics and the calculation of the payment due under SECTION 5.1 of this Agreement. Such verification shall be conducted during normal business hours, and MGI shall bear the fees and expenses of the accountants performing such verification. The accountants appointed pursuant to this Section shall not be authorized to disclose to MGI any information other than the accuracy or inaccuracy of the item(s) to be verified. If the audit reveals that Connetics has over-reported for the period of the audit, MGI shall immediately remit to Connetics any refund due and interest calculated from the payment date on such overpayment at the then-current prime rate. If the audit reveals that Connetics has under-reported for the period of the audit, Connetics shall immediately remit to MGI any balance owing and interest calculated from the date on such overdue amount at the then-current prime rate. In addition, if the audit reveals that Connetics under-reported and underpaid by more than 10%, Connetics shall be responsible for paying the accountants' fees in connection with the audit. ARTICLE 6 MANUFACTURING AND DISTRIBUTION SECTION 6.1. SUPPLY OF PRODUCT. Connetics shall have the sole responsibility, financially and otherwise, for manufacturing the Product, either directly or through one or more contractors (including Affiliates of Connetics), receiving and processing orders, distributing the Product to customers, and handling Product inventory and receivables. Connetics shall bear all costs of such activities, including without limitation all third party royalties (including all payments due to Soltec Research Pty, Ltd.) and cost of goods. Connetics shall use its best efforts to insure, but cannot guarantee, that sufficient stock of the Product will be available in its inventory to promptly fill orders from the trade based on reasonable, non-binding forecasts to be provided by the Joint Marketing Team at the beginning of each fiscal quarter during the Term of this Agreement for that fiscal quarter and the following three (3) fiscal quarters. SECTION 6.2. MONTHLY REPORTING. In order to aid the Joint Marketing Team to provide the forecast to be provided under SECTION 6.1, Connetics within thirty (30) days after the end of a given calendar month (or within a reasonable time after it becomes available) will provide the Coordinators with a written report for that calendar month. This report will set forth, if available, the quantity and dollar amounts of all elements of Product Contribution for the given month, including any deductions taken and corresponding comparisons for the previous year. SECTION 6.3. ORDERS. If, for any reason, MGI receives orders for the Product, MGI shall forward such orders to Connetics as soon as practicable. SECTION 6.4. FAILURE TO SUPPLY PRODUCT. MGI understands and acknowledges that only one (1) contractor (a party not an Affiliate of Connetics) is currently approved by the FDA to manufacture the Product. If Connetics is at any time unable to supply the Product to be sold by Connetics under this Agreement, which failure may be due to the failure of a contract manufacturer 10 to meet its obligations to supply Product to Connetics, such failure will be treated as a force majeure condition under SECTION 11.6 and MGI's obligations hereunder to promote and detail the Product shall be suspended for the period of such inability to supply. In the event that Connetics is unable to cure such inability to supply within a period of six (6) months, MGI may immediately terminate this Agreement for Good Cause, and Connetics shall reimburse MGI for all Marketing Expenses incurred by MGI through the date of termination of this Agreement. ARTICLE 7 REGULATORY AFFAIRS AND MEDICAL INQUIRY SECTION 7.1. FDA APPROVAL. Connetics will maintain ownership of the NDA and file any supplements to it. Connetics shall file, own and maintain in its name any and all regulatory and formulary submissions pertaining to the Product and any and all regulatory and formulary approvals that may be issued with respect to the Product. SECTION 7.2. COMPLAINT HANDLING. Connetics shall have the sole right and responsibility, and shall bear all costs related thereto, to take such actions as may be necessary, in accordance with accepted business practices and legal requirements, to obtain and maintain the authorization and/or ability to market the Product in the Territory, including without limitation the following: (a) responding to customer and medical complaints relating to the quality, strength or purity of the Product, and MGI agrees that it shall promptly refer any such complaints that it receives to Connetics; (b) handling all returns of the Product (if the Product is returned to MGI it shall be shipped to Connetics at a location to be provided by Connetics, with any reasonable or authorized shipping or other documented out-of-pocket costs to be paid by Connetics), and MGI and Connetics shall each advise their customers generally that they should make returns to Connetics; and (c) handling all recalls of the Product (at Connetics' request, MGI will assist Connetics in receiving the recalled Product, and any documented out-of-pocket costs incurred by MGI with respect to participating in such recall shall be reimbursed by Connetics). SECTION 7.3. ADVERSE EVENT REPORTING REQUIREMENTS. Connetics shall be solely responsible for submitting Adverse Event Reports to the FDA, except to the extent (if at all) that MGI may be required by law to make such reports itself. During the Term of this Agreement, MGI shall promptly forward to Connetics at the address set forth in SECTION 11.3 any reports MGI receives of adverse events (distinguished as serious and non-serious by FDA regulations), concerning side effects, injury, toxicity or sensitivity reaction including unexpected increased incidence and severity associated with commercial or clinical uses, studies, investigations or test with the Product (animal or human), throughout the world, whether or not determined to be attributable to the Product. For purposes of this SECTION 7.3, "promptly" means as soon as practicable, but in no event later than (a) five business days for serious adverse events after 11 receipt of complete information regarding such events, or (b) thirty calendar days for non-serious adverse events after receipt of complete information regarding such events. Connetics shall transmit adverse event reports to MGI on a periodic basis, but no less often than once every six (6) months; provided, however, that Connetics shall promptly notify MGI of any adverse event report requiring the cessation or substantial alteration of detailing activities by the MGI Sales Force. MGI shall hold all such communications in the strictest confidence and subject to the terms of SECTION 11.1 of this Agreement. SECTION 7.4. COMMUNICATIONS WITH GOVERNMENT AGENCIES. Connetics shall have the sole right and responsibility and shall bear all costs related to communications with any government agencies to satisfy their requirements regarding the authorization and/or continued authorization to market the Product in commercial quantities in the Territory. MGI shall promptly notify Connetics of any inquiry or other communication that it receives from the FDA concerning the Product. Connetics shall be primarily responsible for all communications with the FDA (and state equivalent agencies) concerning the Product, including but not limited to reporting adverse events and responding to any inquiries concerning advertising, detailing or promotional materials. MGI, however, shall be able to communicate with the any such governmental agency regarding the Product if: (a) such communication is necessary to comply with the terms of this Agreement or the requirements of any law, governmental order or regulation; or (b) MGI, if practical, made a request of such agency to communicate with Connetics instead, and such agency refused such request; provided, however, that before making any communication under this SECTION 7.4, MGI shall, if practical, give Connetics notice as soon as possible of MGI's intention to make such communications, and Connetics shall, if practical, be permitted to accompany MGI, take part in any such communications and receive copies of all such communications. SECTION 7.5. MEDICAL INQUIRIES. MGI shall refer to Connetics all medical questions or inquiries relating to the Product directed to MGI or MGI's Sales Force, except that Adverse Event Reports shall be handled as set forth in SECTION 7.3. MGI's medical inquiry personnel shall instruct individuals who contact MGI or its Sales Force to direct medical inquiries directly to Connetics. SECTION 7.6. POST-MARKET STUDIES. Connetics shall be responsible for, and bear the cost of, conducting any clinical study required by the FDA to maintain the NDA for the Product or establish any new indication or dosage form of the Product. MGI shall not conduct any clinical study nor incur any expenses in anticipation of conducting any such study. The cost of any such study conducted by Connetics shall not be considered Marketing Expenses, or advertising, detailing or promotional expenses for purposes of this Agreement. Conversely, the cost of clinical evaluation programs and marketing support trials meeting the requirement of SECTION 4.2 shall be considered Marketing Expenses for purposes of this Agreement. 12 ARTICLE 8 INTELLECTUAL PROPERTY SECTION 8.1. TRADEMARK LICENSE. Connetics hereby grants to MGI a non-exclusive, royalty-free license to use the following trademarks for the advertising, promotion, marketing, distribution and sale of Product in the Territory: Connetics name Luxiq(TM) LUXIQ(TM) and its Foam Dollop icon, stylized name, and c-globe design, all as set forth on Exhibit A In using the trademarks in materials it generates, MGI shall display the marks in a style or size of print distinguishing the mark from any accompanying wording or text. SECTION 8.2. MARKING. During the Term of this Agreement and if permitted by FDA regulations, all advertising, detailing and promotional materials related to the Product may include both Connetics' name and logo and MGI's name and logo in a manner approved by the Joint Marketing Team. Neither party will acquire any rights in the other party's name or logo on account of its use in advertising, detailing and promotional materials for the Product. Nothing in this Agreement shall be construed to give either party any rights to use the other party's name or logo outside of the Territory or other than in accordance with this Agreement. Neither party shall distribute information that bears the name of the other party unless the information meets the requirements of this SECTION 8.2, or the other party has consented in writing to the use of its name on the information, except that MGI shall be permitted to distribute and use all materials in any form provided or previously approved by Connetics or the Joint Marketing Committee. SECTION 8.3. OWNERSHIP. All proprietary features constituting the trade dress of the Product, including but not limited to the shape and color of the can, cap, label design, the size and configuration of the units in cartons, etc. shall belong exclusively to Connetics. Except as expressly set forth in this SECTION 8.3, Connetics shall own all copyrights to all advertising, detailing, promotional and training materials as well as all other written materials, audiotapes, videotapes, or other copyrightable materials that are created during the Term of this Agreement in connection with the advertising, detailing, marketing and promotion of the Product, and MGI will and does waive all rights in and to any and all such materials. To the extent necessary, Connetics will contract with, and make all arrangements with, any and all third parties for the creation of any such materials. Connetics shall, and does hereby, grant to MGI a royalty-free license to use and reproduce such materials solely in conjunction with its performance of services pursuant to this Agreement, which license MGI shall not assign or transfer. Any copyrights on promotional and training materials made by or on behalf of MGI and funded solely by MGI shall be owned by MGI. MGI hereby grants to Connetics a perpetual, non-exclusive royalty-free license under such copyrights to reproduce, use and sell such promotional and training materials. 13 ARTICLE 9 REPRESENTATIONS AND WARRANTIES SECTION 9.1. REPRESENTATIONS AND WARRANTIES OF CONNETICS. Connetics hereby represents and warrants to MGI as follows: (a) Connetics has the corporate power and authority to execute and deliver this Agreement and to perform its obligations thereunder, and the execution, delivery and performance of this Agreement have been duly authorized by Connetics. (b) Connetics has the right to grant to MGI the rights and licenses granted under this Agreement. (c) To the best of Connetics' knowledge, there are no pending or threatened legal claims relating to the Product, and there is no infringement or threatened infringement of a third party's patent rights with respect to any use or sale of Product in the Territory. SECTION 9.2. REPRESENTATION AND WARRANTY OF MGI. MGI hereby represents and warrants to Connetics that MGI has the corporate power and authority to execute and deliver this Agreement and to perform its obligations thereunder, and the execution, delivery and performance of the Agreement have been duly authorized by MGI. SECTION 9.3. DISCLAIMER OF WARRANTIES. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, CONNETICS MAKES NO WARRANTY WITH RESPECT TO ANY TECHNOLOGY, GOODS, SERVICES, RIGHTS, OR OTHER SUBJECT MATTER OF THIS AGREEMENT AND HEREBY DISCLAIMS ALL WARRANTIES, CONDITIONS OR REPRESENTATIONS OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF PERFORMANCE, MERCHANTABILITY, SATISFACTORY QUALITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS. SECTION 9.4. DISCLAIMER OF MGI. Connetics acknowledges that MGI disclaims any warranty, representation or guarantee that MGI's promotion and detailing of the Product as permitted hereunder will generate any particular level of actual prescriptions, or any increase in sales of the Products, as a result of Calls made to MGI Physicians. ARTICLE 10 INDEMNIFICATION SECTION 10.1. CONNETICS INDEMNITY. (a) Connetics agrees to indemnify and hold harmless MGI, its Affiliates, and their respective officers, directors, employees and agents from and against any and all damages, claims, liabilities, demands, charges, suits, penalties, costs, expenses and obligations to third parties incurred or arising in connection with (i) the manufacture, 14 advertising, promotion, sale, import or use of the Product, including without limitation, product liability and intellectual property infringement claims, or (ii) breach of any warranty, representation or covenant of Connetics contained in this Agreement; provided, however, Connetics' obligations to indemnify MGI in any action related to a claim that the Product infringes the intellectual property of a third party shall be limited to the amount of actual damages awarded to such third party by a court or arbitrator, as the case may be, and to the reasonable costs and expenses (including reasonable attorneys' fees) of MGI, its Affiliates, and their respective officers, directors, employees and agents in connection with such action. Connetics shall have no indemnification obligation under this SECTION 10.1(A) for any claim(s) arising from: (a) any modifications to the Product by MGI where liability would not have occurred but for such modifications; or (b) the negligence or wrongful act of MGI, its officers, agents or employees, including without limitation (i) the detailing and/or promotion of the Product in a manner that is inconsistent with the FDA approval pertaining to the Product, or (ii) any liability arising out of or relating to any representation or statement regarding the Products which is inconsistent with the specifications or product label claims. (b) MGI shall give Connetics prompt written notice of the receipt of any claim or the commencement of any action, suit or proceeding for which MGI may seek indemnification under SECTION 10.1(A) (individually or collectively, referred to hereafter as an "Action"), and Connetics shall assume the defense of the Action; provided that MGI complies with any good faith request made by Connetics for assistance in such defense; and provided further that: (i) MGI shall have the right at any time to participate in any such Action with counsel of its own choice at MGI's sole expense; (ii) if MGI elects for Connetics to defend the Action, then MGI's counsel may participate in all discussions, but shall not be entitled to appear in any legal or judicial proceeding relating to the Action; (iii) if Connetics fails to assume the defense within a reasonable time, MGI may assume such defense, and the reasonable fees and expenses of MGI's attorneys will be covered by the indemnity provided for in SECTION 10.1; and (iv) if a conflict with respect to legal representation arises which cannot be resolved, and MGI is not prepared to waive such conflict, then MGI shall have the right to obtain separate legal counsel at Connetics' expense; provided, however, Connetics shall have no obligation to pay MGI's expenses in connection with MGI obtaining separate legal counsel in any Action brought by Connetics against MGI or any Action brought by MGI against Connetics. Nothing in the foregoing discussion shall give either party the right or authority to settle any Action on behalf of the other party without the other party's written consent. 15 (c) LIMITATION OF LIABILITY. EXCEPT FOR (A) ANY LOSS, LIABILITY, DAMAGE OR OBLIGATION ARISING OUT OF OR RELATING TO THE DISCLOSURE OF CONFIDENTIAL INFORMATION PURSUANT TO SECTION 11.1 OR (B) THE INDEMNITY OBLIGATIONS OF CONNETICS SET FORTH IN SECTION 10.1, OR AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, IN NO EVENT SHALL EITHER PARTY HAVE ANY LIABILITY TO THE OTHER PARTY OR ANY OTHER THIRD PARTY FOR ANY LOST OPPORTUNITY OR PROFITS, COSTS OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES, OR FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES ARISING OUT OF THIS AGREEMENT, UNDER ANY CAUSE OF ACTION OR THEORY OF LIABILITY (INCLUDING NEGLIGENCE), AND WHETHER OR NOT SUCH PARTY TO THIS AGREEMENT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. SECTION 10.2. MGI INDEMNITY. (a) MGI agrees to indemnify and hold harmless Connetics, its Affiliates, and their respective officers, directors, employees and agents from and against any and all damages, claims, liabilities, demands, charges, suits, penalties, costs, expenses and obligations to third parties arising from the negligence or wrongful act of MGI, its officers, agents or employees, including without limitation the detailing and/or promotion of the Product in a manner that is inconsistent with the FDA approval pertaining to the Product. (b) Connetics shall give prompt written notice of the receipt of any claim or the commencement of any action, suit or proceeding for which Connetics may seek indemnification under SECTION 10.2(A), and MGI shall assume the defense thereof; provided, however, that Connetics shall be entitled to participate in any such action, suit or proceeding with counsel of its own choice, but at its own expense. If MGI fails to assume the defense within a reasonable time, Connetics may assume such defense, and the reasonable fees and expenses of its attorneys will be covered by the indemnity provided for in SECTION 10.2. No such claim, action, suit or proceeding shall be compromised or settled in any manner that might adversely affect the interests of MGI without the prior written consent of MGI. SECTION 10.3. INDEMNITY DISPUTES. In the event that both parties claim indemnification for the same claim, action, suit or proceeding, the provisions of SECTIONS 10.1 and 10.2 shall apply, except that the cost of defense shall be shared equally pending final resolution, at which time the party found to be entitled to indemnification shall also be entitled to reimbursement for any amount paid by it as defense costs, in addition to other amounts recoverable under SECTIONS 10.1 AND 10.2, as the case may be. 16 ARTICLE 11 GENERAL TERMS AND CONDITIONS SECTION 11.1. CONFIDENTIALITY. (a) In order to facilitate this Agreement it will be necessary for the parties to exchange certain Proprietary Information. Each party agrees to retain the Proprietary Information of the other party in strict confidence and not to disclose or transfer the Proprietary Information to any party or use the Proprietary Information other than as authorized by the terms of this Agreement or otherwise in writing by the discloser. The parties acknowledge that such Proprietary Information can constitute "inside information" for securities purposes and the responsibility to refrain from any unauthorized disclosure, trading or other such use. Each party represents to the other that it maintains policies and procedures designed to prevent unauthorized disclosure of its own Proprietary Information. All employees of a party performing services under this Agreement shall be subject to agreements prohibiting the disclosure of Proprietary Information except on the terms permitted in this Agreement. (b) These obligations of confidentiality and non-use shall not apply to Proprietary Information: (a) that was previously known to the recipient as evidenced by recipient's written records, (b) that is lawfully obtained by recipient from a source independent of the disclosing party, (c) that is now or becomes public knowledge other than by breach of this Agreement, or (d) that is legally required to be disclosed under federal or state law, provided that the party or its Affiliate required to make the disclosure takes reasonable steps, consistent with protection it would seek for its own confidential information, to prevent the Proprietary Information from becoming public. (c) Each party shall have the right to disclose the Proprietary Information of the other to those of its Affiliates that need the Proprietary Information for the purposes of this Agreement, provided that each such Affiliate agrees to be bound to the other party by the provisions of this ARTICLE 11 and the disclosing party guarantees the performance under this Agreement of any such Affiliate. (d) These obligations of confidentiality and non-use shall survive the expiration or termination of this Agreement. SECTION 11.2. ARBITRATION AND APPLICABLE LAW. Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach or termination of this Agreement, shall be settled by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction. In any arbitration pursuant to this SECTION 11.2, the award shall be rendered by a majority of the members of a board of arbitration consisting of three members, one being appointed by each party and the third being appointed by mutual agreement of the two arbitrators appointed by the parties. The place of arbitration shall be Chicago, Illinois. The arbitrators shall apply the law of the State of New York (regardless of that jurisdiction's or any other jurisdiction's choice of law principles). 17 SECTION 11.3. NOTICES. Any notice required or permitted by the terms of this Agreement shall be given by overnight carrier, or by registered mail, prepaid and properly addressed, or delivered by hand, If to Connetics, to: 3400 West Bayshore Road Palo Alto, California 94303 Attn.: President and Chief Executive Officer And if to MGI, to: Suite 300 E, Opus Center 9900 Bren Road East Minnetonka, MN 55343-9667 Attn.: President and Chief Executive Officer or at such other address as either party may designate by notice pursuant to this Section. Any such notice shall be deemed to have been given when received. SECTION 11.4. TERM AND TERMINATION. (a) Term. The term of this Agreement shall begin on the Effective Date and shall continue, unless terminated sooner in accordance with this Agreement, until thirty (30) months after the Effective Date. This Agreement may be renewed upon the mutual agreement of the parties. (b) Termination for Good Cause. Either party may terminate this Agreement for Good Cause effective at any time after providing sixty (60) days written notice and an opportunity to cure during such sixty (60) day period; provided, however, that either party shall have the right to terminate this Agreement immediately upon written notice to the other party if an inability to supply (as described in SECTION 6.4) has continued for six (6) months. If a cure is effected, the notice with respect to such Good Cause shall be null and void. (c) Termination for Other Reasons. Either party shall have the right to terminate this Agreement in the event of a large scale recall or withdrawal of the Product from the Territory resulting from a significant safety risk inherent in the Product and not due to tampering, a remediable manufacturing problem, or other defect that can be cured with respect to Product manufactured after such risk is discovered. Termination of this Agreement shall be without prejudice to (i) any remedies that any party may then or thereafter have under this Agreement or at law; (ii) a party's right to receive any payment accrued under the Agreement prior to the termination date but which became payable thereafter; or (iii) either party's right to obtain performance of any obligation provided for in this Agreement that survives termination by its terms or by a fair interpretation of this Agreement. 18 (d) Effect of Expiration or Termination. Unless otherwise explicitly stated in this Agreement, MGI shall not be entitled to compensation for sales of Product after termination of this Agreement. If either party terminates this Agreement for Good Cause, Connetics shall pay to MGI all of the compensation due MGI under SECTION 5.1 (up to and including any portion of the calendar month in which effective termination occurs, including sums that have accrued but have not yet been paid as of the effective date of termination). If MGI terminates this Agreement for Good Cause, or upon the natural expiration of this Agreement pursuant to SECTION 11.4(A) including any renewal, Connetics (or its successor) shall make payments to MGI of (i) all of the compensation due MGI under SECTION 5.1 (up to and including any portion of the calendar month in which effective termination occurs, including sums that have accrued but have not yet been paid as of the effective date of termination), and (ii) Fifty percent (50%) of the amounts due to MGI pursuant to SECTION 5.1 for sales made thereafter in each quarter (or portion thereof) until one year from the date on which this Agreement terminates. SECTION 11.5. ANNOUNCEMENTS/PUBLICITY. Subject to the requirements of law and/or Nasdaq, any announcements or publicity to be made or given in respect of this Agreement by either party shall be subject to the prior approval of the other party (such approval not to be unreasonably withheld or delayed) where such announcement or publicity refers to such other party. SECTION 11.6. FORCE MAJEURE. Neither party shall be liable for failure to perform any duty or obligation that party may have under this Agreement where such failure has been occasioned by any force majeure which shall mean and include government regulation, fire, flood, war, public disaster, strike or labor dispute, inevitable accident, national emergency, or any other cause outside the reasonable control of the party having the duty so to perform. Such failure to perform shall only be excusable under the provisions of this Section for so long as, and to the extent that, the same is rendered impossible by force majeure. The party claiming that force majeure has occurred shall send to the other party within five (5) working days of the first occurrence of force majeure full particulars including the date of first occurrence and of the cause or event giving rise to it. Notwithstanding the relief granted to any party by this Section, the relevant party shall nevertheless use its reasonable endeavors in any situation where it has invoked this Section to perform its relevant obligations as soon as possible after force majeure has ceased. If a force majeure event lasts longer than six (6) months, the unaffected party shall have, in addition to the right to terminate this Agreement for Good Cause under SECTION 11.4, the optional right to continue the Agreement in full force and effect without modification. SECTION 11.7. ASSIGNMENT. Unless otherwise agreed this Agreement may not be assigned by either of the parties except in the case of a merger or sale of all the assets of the business related to this Agreement. SECTION 11.8. SURVIVAL. The covenants and agreements set forth in SECTION 4.5(B) and ARTICLES 5 (TO THE EXTENT SPECIFIED IN SECTION 11.4(D)), 9, 10 and 11 shall survive any termination or expiration of this Agreement and remain in full force and effect regardless of the cause of termination. SECTION 11.9. NONWAIVER OF RIGHTS. No failure or delay on the part of a party in exercising any right hereunder will operate as a waiver of, or impair, any such right. No single or 19 partial exercise of any such right will preclude any other or further exercise thereof or the exercise of any other right. No waiver of any such right will be deemed a waiver of any other right hereunder. SECTION 11.10. HEADINGS. Section headings contained in this Agreement are included for convenience only and form no part of the agreement between the parties. SECTION 11.11. VALIDITY OF PROVISIONS AND SEVERABILITY. If any provision of this Agreement is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction: such provision will be deemed amended to conform to applicable laws of such jurisdiction so as to be valid and enforceable, or, if it cannot be so amended without materially altering the intention of the parties, it will be stricken; the validity, legality and enforceability of such provision will not in any way be affected or impaired thereby in any other jurisdiction; and the remainder of this Agreement will remain in full force and effect. SECTION 11.12. NO HIRE. During the term of this Agreement and for six (6) months thereafter, neither party nor its Affiliates shall solicit nor hire any individual in the other party's Sales Force without such party's prior written consent which consent such party may grant in its sole discretion. SECTION 11.13. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties with respect to the subject matter hereof. This Agreement may not be modified except by a writing signed by the parties' authorized representatives. [REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 20 IN WITNESS WHEREOF, the parties have entered into this Agreement as of the Effective Date. Connetics Corporation, MGI Pharma, Inc. a Delaware corporation a Minnesota corporation By /s/ T. Wiggans By /s/ C. N. Blitzer ------------------------------- ---------------------------------- Thomas G. Wiggans Charles N. Blitzer President & Chief Executive President & Chief Executive Officer Officer 21 Exhibit A Foam Dollop icon, stylized logo, and c-globe design EX-10.3 4 AMENDMENT NO. 2 TO LICENSE AGREEMENT 1 EXHIBIT 10.3 AMENDMENT NO. TWO TO LICENSE AGREEMENT THIS AMENDMENT NUMBER TWO TO LICENSE AGREEMENT FOR INTERFERON GAMMA ("AMENDMENT") is entered into effective January 15, 1999, by and between Genentech, Inc. ("Genentech") and Connetics Corporation ("Connetics"). R E C I T A L S A. The Parties have previously entered into that certain License Agreement for Interferon Gamma, dated May 5, 1998, as amended on December 23, 1998 (the "License Agreement"). B. Pursuant to Section 2.3(c) of the License Agreement, Connetics has the right to sublicense certain of its rights under the Agreement to InterMune Pharmaceutical, Inc. ("InterMune"), and has in fact entered into a sublicense to that effect dated August 21, 1998 C. On December 3, 1998, the Parties entered into a Letter Agreement to document the intent and agreement of Connetics and Genentech with respect to additional terms governing the transfer and distribution of Interferon Gamma-1B, pending the preparation of an amendment to the License Agreement. D. The Parties now desire to enter into a definitive amendment to the License Agreement, effective as of the date first written above, to permit a limited distribution of Interferon Gamma-1B by Connetics or its sublicensee under Genentech labels and to add other additional terms governing the transfer and distribution of Interferon Gamma-1B. NOW THEREFORE, the Parties hereby agree as follows: AGREEMENT 1. Terms not otherwise defined in this Amendment shall have the meanings defined in the License Agreement. 2. Section 1.29 of the License Agreement is hereby deleted and replaced in its entirety as follows: 2 1.29 "Transfer Date" shall mean January 15, 1999, unless otherwise mutually agreed to in writing by the Parties. 3. A new Section 1.30 is added to the License Agreement to read in its entirety as follows: 1.30 "Connetics Product" shall mean Finished Product under the ACTIMMUNE(R) trademark and labeled under the name of Connetics or its sublicensee. For clarification, all terms and conditions of this Agreement that apply to Finished Product shall also apply to Connetics Product. 4. A new Section 1.31 is added to the License Agreement to read in its entirety as follows: 1.31 "Distribution Period" shall mean the period of time beginning January 15, 1999 and ending on the earlier of: (a) the first date on which Genentech supplies InterMune with Connetics Product or (b) sixty (60) days after InterMune's receipt of a license from the FDA to sell Interferon Gamma-1B for CGD. 5. A new Section 1.32 is added to the License Agreement to read in its entirety as follows: 1.32 "Genentech Finished Product" shall mean Genentech's inventory of Interferon Gamma-1B under the ACTIMMUNE(R) trademark and labeled under Genentech's name. For clarification, Genentech Finished Product is a Licensed Product under this Agreement. 6. A new Section 1.33 is added to the License Agreement to read in its entirety as follows: 1.33 "Genentech Bulk Product" shall mean Genentech's inventory of Interferon Gamma-1B bulk protein existing as of the Transfer Date. 7. A new Section 1.34 is added to the License Agreement to read in its entirety as follows: 1.34 "Genentech Product" shall mean, together, Genentech Finished Product and Genentech Bulk Product. 2 3 8. A new Section 1.35 is added to the License Agreement to read in its entirety as follows: 1.35 "Fully Burdened Manufacturing Cost" shall mean [*], which shall be comprised of the sum of: [*]. 9. A new Section 1.36 is added to the License Agreement to read in its entirety as follows: 1.36 "Third Party Manufacturing Royalties" shall mean all royalties paid or incurred by Genentech to third parties under licenses taken by Genentech with respect to patents or patent applications that, but for such license(s), would be infringed by the manufacture, use, sale, offer for sale or importation of Genentech Finished Product or Genentech Bulk Product, which royalties are based on the manufacture and sale of Genentech Finished Product or Genentech Bulk Product by Genentech (or its contract manufacturer) or by Connetics or its sublicensees (or a contract manufacturer on their behalf). Genentech shall notify Connetics in writing during the term of this Agreement if it becomes aware of any Third Party Manufacturing Royalties. 10. A new Subsection 2.5(k) is added to the License Agreement to read in its entirety as follows: 2.5(k) Provided that all the activities listed on Exhibit H attached hereto are completed, Genentech also shall transfer to Connetics or its sublicensee on the Transfer Date all responsibility for the distribution, sales and product support of Genentech Finished Product, in the Territory, for the treatment of infections associated with CGD, subject to the provisions of Section 4.3 below and the following terms and conditions: (i) Product support of Genentech Finished Product shall include, without limitation, all financial services, all reporting required by federal and state law or regulation, professional services, customer inquiries, product returns, government chargebacks, product refunds, and patient assistance programs, *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 3 4 except for the processing of state Medicaid invoices and certain product returns, as provided in Subsections 2.5(k)(iii) and (iv) below. (ii) Connetics or its sublicensee shall sell and distribute Genentech Finished Product only during the Distribution Period, after which time Connetics or its sublicensee shall market, sell and distribute Connetics Product, or other Finished Product, for CGD. Notwithstanding the foregoing, for a period of ten (10) business days after the last day of the Distribution Period, Connetics or its sublicensee may continue to sell and distribute its existing inventory of Genentech Finished Product in order to reduce or exhaust such existing inventory. Under no circumstances, however, will Genentech be required to manufacture, fill, label, package, or otherwise supply Genentech Finished Product to Connetics or its sublicensees after the end of the Distribution Period. After the Distribution Period Connetics or its sublicensees shall retain full responsibility, and provide all product support, for all Genentech Product sold or distributed by Genentech, Connetics or its sublicensees, prior to, during and after the Distribution Period, including without limitation, Genentech Product in distribution channels. (iii) Notwithstanding the above, Genentech shall remain responsible for processing state Medicaid invoices for Genentech Finished Product, in accordance with this subsection, during the Distribution Period and for that period of time after the Distribution Period during which states continue to send Medicaid rebate invoices for Genentech Finished Product sold under the Genentech NDC label number 50242. Within fifteen (15) days after the end of each calendar quarter, Connetics or its sublicensee shall supply Genentech with a report of its Average Manufacturer Price ("AMP") and Best Price ("BP"), as defined in the U.S. Omnibus Budget Reconciliation Act of 1990 ("OBRA 90"), for Genentech Finished Product for such quarter, and detailed calculations determining such AMP and BP. The AMP, BP and supporting calculations shall be based on the carton price for Genentech Finished Product. Genentech shall report such quarterly AMP and BP to the Health Care Finance Administration as required by law and regulation, and will also process state Medicaid rebate invoices received for Genentech Finished Product. Genentech will pay, adjust or dispute the state Medicaid rebate invoices as permitted under OBRA 90. Within sixty (60) days of receipt of an invoice from Genentech, Connetics or its sublicensee will reimburse Genentech the full amounts of Medicaid rebates paid by Genentech. Genentech will have the right to examine, but not more than once every calendar year, the books of account and records of Connetics and its sublicensees for the purpose of determining the correctness of the quarterly reports provided by Connetics or its sublicensees under this subsection. If Genentech reasonably determines that any such reports(s) were incorrect, Connetics shall pay Genentech's costs of correcting its reports to federal agencies and will also pay any penalties or fees associated with such incorrect reporting. (iv) As of the Transfer Date, Connetics or its sublicensees will be responsible for processing returns and related credits for all Finished Product, 4 5 except that Genentech will process credits for returns of Genentech Finished Product if Genentech receives a returned Genentech Finished Product from a third party. Within sixty (60) days of receipt of an invoice from Genentech, Connetics or its sublicensees will reimburse Genentech for such return credits processed by Genentech. (v) Connetics or its sublicensees shall be responsible for all government chargebacks for Genentech Finished Product sold by wholesalers to customers on and after the Transfer Date, and for all government chargebacks for all Connetics Product and other Finished Product sold by Connetics and its sublicensees. (vi) Connetics and its sublicensees shall not actively market or promote Interferon Gamma-1B during the Distribution Period and while selling or distributing Genentech Finished Product. During the Distribution Period, Connetics and its sublicensees shall not distribute any notice, publication or make any presentation to any third party regarding Interferon Gamma-1B without Genenetch's prior review of such notice, publication or presentation, and receipt of Genentech's prior written consent. Connetics and its sublicensees shall not sell Genentech Finished Product at a price higher than that charged by Genentech on January 14, 1999. 11. A new Section 2.5(l) is added to the License Agreement to read in its entirety as follows: 2.5(l) Connetics agrees that, as of the Transfer Date and under the terms and conditions below, it or its sublicensee will supply Genentech Finished Product to those certain patients in the U.S. to whom Genentech has an existing contractual or regulatory obligation to supply Interferon Gamma-1B, including prior clinical study patients. In addition, Connetics or its sublicensee will supply Genentech Finished Product to Hoffman-LaRoche Canada Limited ("Roche Canada") for distribution to patients to whom there is a contractual or regulatory obligation to supply Interferon Gamma-1B. Connetics also agrees that it or its sublicensee will supply Genentech Finished Product free of charge to those [*] oncology study patients (including [*] National Cancer Institute oncology clinical trial patients) who are continuing to receive Interferon Gamma-1B. Genentech shall supply a list of all such patients, and information regarding the amount and destination of such Interferon Gamma-1B, as soon as reasonably possible. After the end of the Distribution Period, Connetics or its sublicensee shall supply Connetics Product, or other Finished Product, to such patients and to Roche Canada in the same quantities. No other right or license is implied or granted to Connetics or its sublicensees to distribute Genentech Finished Product, or any other Licensed Product, outside the Field of Use or outside the Territory. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 5 6 (i) To supply the patients and Roche Canada as described above, Connetics or its sublicensee shall pay a price for such Genentech Finished Product, and such Connetics Product and other Finished Product supplied by Genentech, equal to [*] percent [*] of Genentech's Fully Burdened Manufacturing Cost, plus [*] of Third Party Manufacturing Royalties attributable to the manufacture or distribution of such Genentech Finished Product or other Finished Product. (ii) For U.S. CGD clinical study patients that do not qualify for Connetics' (or its sublicensee's) indigent patient program, Connetics (or its sublicensee) shall supply, at its own cost, Genentech Finished Product and Finished Product to such patients free of charge for a period of time ending not later than December 31, 1999. Connetics (or its sublicensee) shall notify such patients that such drug shall not continue to be supplied free of charge by Genentech, Connetics or its sublicensee, and Connetics or its sublicensee shall use its best efforts to terminate such supply of drug before December 31, 1999, after reasonable prior notice to such patients. [*] (iii) Roche Canada will reimburse Connetics, or its sublicensee, for its cost of supplying such Genentech Finished Product and Connetics Product to the patients in Canada under a separate agreement to be negotiated and executed by Roche Canada and Connetics. (iv) Connetics, or its sublicensee, will supply Genentech Finished Product and Finished Product to the [*] oncology patients without charge to Genentech or to such patients. If, however, Genentech has not extended the Field of Use of this Agreement to the field of oncology within six (6) months of the Effective Date of this Amendment No. 2, then Genentech will reimburse Connetics, or its sublicensee, for the cost of such Genentech Finished Product and Finished Product during such six month period. If Genentech thereafter extends the Field of Use to oncology, then as of the effective date of such extension Connetics or its sublicensee will provide Finished Product to such patients without charge to Genentech or to such patients. If Genentech does not extend the Field of Use to oncology, Connetics or its sublicensee will continue to supply such oncology patients, but Genentech will reimburse Connetics, or its sublicensee, for such drug in an amount equal to one hundred percent (100%) of the price paid to Genentech for such Genentech Finished Product and Finished Product and the direct administrative and distribution costs of providing such drug to such patients. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 6 7 12. A new Section 4.3 is added to the License Agreement to read in its entirety as follows: 4.3 (a) Genentech shall sell to Connetics, or its sublicensee, Genentech's existing inventory of Genentech Product for commercial sale solely for the treatment of infections associated with CGD. Connetics shall pay a price for such Genentech Product equal to [*] percent [*] of Genentech's Fully Burdened Manufacturing Cost, plus [*] of Third Party Manufacturing Royalties attributable to the manufacture or sale of such Genentech Product. (b) Genentech shall deliver Genentech Finished Product to Connetics to a single destination in the United States chosen by Connetics, by carrier identified by Connetics. Title and risk of loss as to all Genentech Finished Product shall pass to Connetics at point of origin (FOB Genentech). Connetics shall be responsible for all freight, freight brokerage, insurance and other costs associated with shipping Genentech Finished Product hereunder. As soon as reasonably possible after each shipment of Genentech Finished Product, Genentech shall forward to Connetics all customary documents concerning the shipment, including Genentech's invoice relating to such shipment. To the extent possible, a certificate of analysis will be included in each shipment. Where it is not possible to include a certificate of analysis with a shipment, Genentech shall furnish the same to Connetics as soon as reasonably possible. (c) Payment by Connetics shall be made within sixty (60) days after Connetics' receipt of Genentech's invoice for the supply of Genentech Finished Product. All payments to Genentech by Connetics under this Agreement shall be made in United States dollars by wire transfer (or such other reasonable means as Genentech may direct) to such United States bank account as Genentech may direct. If a wire transfer is to be made, Connetics shall provide notice at least five (5) days prior to the date of transfer of the amount of payment and the date good funds will be received. Such notice should be given to the Treasurer of Genentech at the address set forth at the beginning of this Agreement or such other address as Genentech may subsequently direct. (d) Genentech shall use its best efforts to maintain its Fully Burdened Manufacturing Cost for Genentech Finished Product at or below the benchmark costs of [*] dollars [*] per vial of Genentech Finished Product (the "Benchmark Costs"). All the provisions of Section 2.6(e) of that certain Supply Agreement, dated May 5, 1998, between Genentech and Connetics, shall apply to such Benchmark Costs herein. (e) All transfer of Genentech Finished Product to Connetics or its sublicensee hereunder shall be subject to the provisions hereof and shall not be subject to the terms and conditions contained on any purchase order or *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 7 8 confirmation by Genentech, except insofar as any such purchase order or confirmation establishes: (i) the quantity and form of Genentech Product; (ii) the shipment date; (iii) the shipment routes and destinations; or (iv) the carrier. 13. This Amendment supersedes in its entirety the Letter Agreement dated December 3, 1998. 14. All other terms and provisions of the License Agreement, including all exhibits to that Agreement, will continue in full force and effect as though fully set forth in this Amendment. Nothing in this Amendment shall be construed as affecting Connetics' obligations to be liable and responsible for the performance of all of the obligations of Connetics and its sublicensees under the License Agreement. IN WITNESS WHEREOF, the parties have executed this Amendment Number Two to License Agreement as of the date first written above. GENENTECH, INC. CONNETICS CORPORATION By: /s/ Nicholas J. Simon By: /s/ T. Wiggans --------------------------------- ---------------------------------- Name: Nicholas J. Simon Thomas G. Wiggans ------------------------------ President and Chief Executive Officer Title: Vice President, Business and Corporate Development ------------------------------ Acknowledged and agreed as to InterMune's rights and obligations hereunder as Connetics' sublicensee under the License Agreement: INTERMUNE PHARMACEUTICALS, INC. By: /s/ Scott Harkonen --------------------------------- Scott Harkonen, M.D. President 8 EX-10.4 5 AMENDMENT #3 TO LICENSE AGREEMENT 1 EXHIBIT 10.4 AMENDMENT NO. THREE TO LICENSE AGREEMENT THIS AMENDMENT NUMBER THREE TO LICENSE AGREEMENT FOR INTERFERON GAMMA ("Amendment") is entered into effective April 27, 1999 (the "Amendment Effective Date"), by and between Genentech, Inc. ("Genentech") and Connetics Corporation ("Connetics"). Genentech and Connetics may each be referred to herein as a "Party" and jointly as the "Parties." RECITALS A. The Parties have previously entered into that certain License Agreement for Interferon Gamma, dated May 5, 1998, as amended on December 23, 1998 and on January 15, 1999 (the "License Agreement"). B. Pursuant to Section 2.3(c) of the License Agreement, Connetics has the right to sublicense certain of its rights under the Agreement to InterMune Pharmaceuticals, Inc. ("InterMune"), and has in fact entered into such sublicense to that effect dated August 21, 1998. C. The Parties have entered into that certain letter agreement dated January 5, 1999 and revised on March 1, 1999 (the "Letter Agreement"), documenting the intent and agreement of Connetics and Genentech with respect to certain additional rights to be granted to Connetics and its sublicensees under the Genentech License, pending the preparation of an amendment to the License Agreement. D. In consideration of such additional rights, [*]. E. The Parties now desire to enter into a definitive amendment to the License Agreement, as of the Amendment Effective Date, through which Genentech shall grant, and Connetics and InterMune shall accept, such certain additional rights under the License Agreement. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and conditions herein contained, and intending to be legally bound hereby, the Parties mutually agree as follows: 1. Terms not otherwise defined in this Amendment shall have the meanings defined in the License Agreement. 2. A new Section 1.7.1 is hereby added to read in its entirety as follows: *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 2 1.7.1 "Combination Product Adjustment" shall mean the following: in the event that a Licensed Product is sold in the form of a combination product containing one or more active ingredients or components in addition to such Licensed Product, Net Sales for such combination product will be adjusted by multiplying actual Net Sales of such combination product by the fraction A/(A + B) where A is the invoice price of the Licensed Product, if sold separately, and B is the invoice price of any other active ingredient(s) or component(s) in the combination, if sold separately. If, on a country-by-country basis, the other active ingredient(s) or component(s) in the combination are not sold separately in said country, Net Sales shall be calculated by multiplying actual Net Sales of such combination product by the fraction A/C where A is the invoice price of the Licensed Product if sold separately, and C is the invoice price of the combination product. If, on a country-by-country basis, neither the Licensed Product nor the other active ingredient(s) or component(s) of the combination product is sold separately in said country, Net Sales allocable to the Licensed Product shall be determined by mutual agreement reached in good faith by the Parties based on an equitable method of determining such Net Sales that, among other considerations, takes into account, on a country-by-country basis, variations in potency, the relative contribution of each active ingredient or component in the combination product and the relative value to the end-user of each active ingredient or component. 3. Section 1.12 of the License Agreement is hereby deleted and replaced in its entirety as follows: 1.12 "Field of Use" shall mean the administration to humans of Licensed Protein Product for the treatment or prevention of any human disease or condition, [*]. Each "indication" listed on Exhibit E attached hereto shall be referred to herein individually as an "Area of the Field of Use" and collectively as "Areas of the Field of Use." 4. A new Section 1.15.1 is hereby added to the Agreement to read in its entirety as follows: 1.15.1 "Gene Therapy Field of Use" shall mean the administration to humans of Licensed Gene Product for Gene Therapy for the treatment or prevention of any human disease or condition, [*]. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 2 3 5. Section 1.18 of the License Agreement is hereby deleted and replaced in its entirety as follows: 1.18 "Genentech Patent Rights" shall mean all patents and patent applications and any patents issuing therefrom, together with any extensions, reissues, reexaminations, substitutions, renewals, divisions, continuations and continuations-in-part thereof: (a) that are owned or controlled by Genentech presently or hereafter, during the term of this Agreement, and under which Genentech is free to license or sublicense; and (b) to the extent they claim or directly relate to: (i) Interferon Gamma or the manufacture or use of Interferon Gamma in the Field of Use, or (ii) IG Nucleotide Sequence or the manufacture or use of IG Nucleotide Sequence in the Gene Therapy Field of Use; including, without limitation, the patent rights granted under that certain license agreement between Genentech and Children's Medical Center Corporation, dated July 16, 1990 (the "CMCC License"), but specifically excluding any rights granted to Genentech under the Biogen License. Genentech Patent Rights shall include, without limitation, the patents and patent applications listed in Exhibit A attached hereto. Notwithstanding the foregoing, Genentech Patent Rights shall exclude any rights Genentech acquires after the Effective Date under third-party license agreements, with the exception of those rights acquired under the CMCC License, unless and until the Parties mutually agree on terms and conditions for the sublicense of such rights from Genentech to Connetics. 6. A new Section 1.20.1 of the License Agreement is hereby added to read in its entirety as follows: 1.20.1 "IG Nucleotide Sequence" shall mean any DNA or RNA sequence encoding Interferon Gamma. 7. Section 1.22 of the License Agreement is hereby deleted and replaced in its entirety as follows: 1.22 "Licensed Product" shall mean, collectively: (a) Any pharmaceutical formulation containing Interferon Gamma, whether alone or together with or incorporated into any other substance or product or material or device, whether active or not, and which (i) but for the licenses granted hereunder, the manufacture, use, sale, offer for sale or importation of which in the Territory would infringe or contribute to the infringement of the Genentech Patent Rights in the Territory, or (ii) is based upon or incorporates or utilizes Genentech Knowhow (a "Licensed Protein Product"); and 3 4 (b) Any pharmaceutical formulation containing the IG Nucleotide Sequence, whether alone or together with or incorporated into any other substance or product or material or device, whether active or not, and which but for the licenses granted hereunder, the manufacture, use, sale, offer for sale or importation of which in the Territory would infringe or contribute to the infringement of the Genentech Patent Rights in the Territory (a "Licensed Gene Product"). 8. The following two sentences are hereby added to the end of Section 1.25: [*] shall also be deducted from the gross invoiced sales prices charged for such Licensed Products in determining Net Sales for such Licensed Products. In the event that a Licensed Product is sold in the form of a combination product containing one or more active ingredients or components in addition to such Licensed Product, Net Sales for such combination product will be calculated in accordance with the Combination Product Adjustment." 9. Section 1.28 of the License Agreement is hereby deleted and replaced in its entirely as follows: 1.28 "Territory" shall mean the United States of America, and its territories and possessions, and Japan. 10. A new Section 1.37 is hereby added to the License Agreement to read in its entirety as follows: 1.37 "Third Party Product Rights" shall mean any rights licensed or sublicensed to any third party by Genentech as of the Effective Date to use, manufacture or sell (a) Interferon Gamma, (b) the IG Nucleotide Sequence or (c) any pharmaceutical formulation containing either or both of Interferon Gamma and the IG Nucleotide Sequence, whether alone or together with or incorporated into any other substance or product or material or device, whether active or not; [*]. 11. Section 2.1 of the License Agreement is hereby deleted and replaced in its entirety as follows: 2.1 Patent and Knowhow License Grants. (a) Genentech hereby grants to Connetics an exclusive license, even as to Genentech, under Genentech Patent Rights and under Genentech Knowhow to use, sell, offer for sale and import (but not to make or have made) Licensed Protein Products in the Field of Use in the Territory (excluding Japan), (excluding, with respect to the fields of (i) scleroderma and (ii) infectious disease or condition caused by human papillomavirus, Licensed Protein Products containing any form of Interferon Gamma other than *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 4 5 Genentech Gamma Interferon (DELTA)3 (as that term is defined in the Biogen License)). Notwithstanding the foregoing, Genentech reserves the right to use (but not to import, offer for sale or sell) Licensed Protein Products within the Field of Use solely for non-commercial research purposes. (b) Genentech hereby grants to Connetics a non-exclusive license under Genentech Patent Rights and under Genentech Knowhow to use, sell, offer for sale and import (but not to make or have made) Licensed Protein Products containing any form of Interferon Gamma other than Genentech Gamma Interferon (DELTA)3 (as that term is defined in the Biogen License) in the Territory (excluding Japan) in the fields of: (i) scleroderma and (ii) infectious disease or condition caused by human papillomavirus. (c) Genentech hereby grants to Connetics a non-exclusive sublicense under the Biogen License Rights to use, sell, offer for sale and import Licensed Protein Products (excluding Licensed Protein Products containing Biogen Gamma Interferon (DELTA)0 (as that term is defined in the Biogen License)) in the Territory (excluding Japan) in the fields of scleroderma and infectious disease or condition caused by human papillomavirus. (d) Genentech hereby grants to Connetics a non-exclusive license under Genentech Patent Rights to make or have made in the Territory (excluding Japan) Licensed Protein Products for use or sale in the Field of Use in the Territory (excluding Japan). (e) Genentech hereby grants to Connetics a non-exclusive license under Genentech Patent Rights and Genentech Knowhow to use non-human animal species derived homologues of Interferon Gamma ("Non-human Interferon Gamma") solely for non-commercial research purposes to support the Field of Use in the Territory (excluding Japan). Genentech hereby grants to Connetics a non-exclusive license under Genentech Patent Rights to use non-human animal species derived homologues of IG Nucleotide Sequence ("Non-human Interferon Gamma-encoding IG Nucleotide Sequence") solely for non-commercial research purposes to support the Gene Therapy Field of Use in the Territory (excluding Japan). (f) Genentech hereby grants to Connetics a co-exclusive license under Genentech Patent Rights to use, make, have made, import, offer for sale and sell Licensed Gene Products in the Gene Therapy Field of Use in the Territory (excluding Japan). Notwithstanding the foregoing, Genentech reserves the right to use (but not to import, offer for sale or sell) Licensed Gene Products within the Gene Therapy Field of Use solely for non-commercial research purposes. As used in this subsection (f), "co-exclusive" shall mean that (i) Genentech shall not grant a license to any party other than Connetics to use, make, have made, import, offer for sale or sell Licensed Gene Products in the Gene Therapy Field in the Territory (excluding Japan) [*] and (ii) Genentech shall not authorize or approve any grant or assignment [*]. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 5 6 (g) (i) Genentech hereby grants to Connetics an exclusive license, even as to Genentech, under Genentech Patent Rights and under Genentech Knowhow, in Japan to make, have made, use, sell, offer for sale and import [*]. (ii) Connetics, its Affiliates and sublicensees hereunder shall [*] to the extent based, in whole or in part, upon [*] [*] [*] for indications (including, without limitation, the treatment of [*] shall not extend to: [*] the manufacture, use or sale [*] for the treatment of [*]. Connetics' and its Affiliates' and sublicensees' [*] shall terminate with respect to [*]. (iii) In the event that any Third Party Product Rights held by a third party [*] revert to Genentech, then Genentech shall notify Connetics or its designated sublicensee in Japan of such reversion, and upon such notice Genentech shall be deemed to have automatically granted to Connetics the license under Genentech Patent Rights and under Genentech Knowhow to all such reverted rights, which license shall be exclusive to the extent that such reverted rights were exclusive. All rights granted to Connetics pursuant to this subsection (iii) shall be subject to the terms of this Agreement, including without limitation subsection (ii) above, Section 3.2(g) and Section 8.3. (h) In the event that any Third Party Product Rights (other than those described in subsection (g) above) shall revert to Genentech, then Genentech shall notify Connetics of such reversion. For the ninety (90) day period following its receipt of such notice, Genentech and Connetics shall negotiate exclusively in good faith the reasonable commercial terms upon which Genentech would be willing to grant to Connetics the license to such reverted rights. If the Parties fail to enter a written agreement for a license to such rights by the end of such ninety (90) day period, then Genentech shall have no *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 6 7 further obligation to Connetics with respect to such rights; provided that for six (6) months following such ninety (90) day period, Genentech shall not enter into an agreement to grant a license to such rights with a third party on terms that, taken as a whole, are less favorable to Genentech than those last offered by Connetics for such rights. [*] Nothing in the preceding sentence shall imply any [*]. Connetics may not transfer its rights under this Section 2.1(h) to any party other than InterMune without Genentech's prior written consent. Except as expressly granted herein, there are no implied licenses under the Genentech Patent Rights or any other intellectual property rights owned or controlled by Genentech. 12. Section 2.3(b) of the License Agreement is hereby deleted and replaced in its entirety as follows: (b) Connetics may grant one or more sublicenses under the rights granted in Sections 2.1(a), (b), (c), (e), (f) and (g) in the Field of Use and the Gene Therapy Field of Use, on thirty (30) days prior written notice to Genentech, and subject to Genentech's prior written approval, which approval shall not be unreasonably withheld. 13. A new Section 3.2(g) is hereby added to read in its entirely as follows: (g) In addition to the Clinical Development Milestones (as set forth in Exhibit E hereto), Connetics shall use its Best Efforts to develop and commercialize Licensed Products: (i) in the Field of Use with respect to indications and diseases that, under the provisions of this Amendment, have been added to the "Field of Use" as defined in the original License Agreement executed as of May 5, 1998, and (ii) in the Gene Therapy Field of Use. Such additional indications and diseases in the Field of Use, and the Gene Therapy Field of Use, collectively are referred to in this subsection (g) as the "Additional Indications." In the event that Connetics is not conducting such development efforts with respect to any Additional Indication(s) in a country or countries in the Territory as of the [*] (or if rights to such Additional Indication were granted to Connetics pursuant to Section 2.1(g)(iii), then as of the [*] that Genentech notifies Connetics or its designated sublicensee regarding such rights as set forth in that Section) or at any time thereafter, Genentech shall have the right to terminate this Agreement, and the licenses granted hereunder, with respect to Licensed Products for such Additional Indication(s) in such country or countries, upon [*] days prior written notice to Connetics, unless Connetics can reasonably demonstrate, during such notice period, by its written records that as of the date of such notice it is conducting such development efforts with respect to such Additional Indication(s) in such country or countries. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 7 8 14. Sections 8.2(a) and (b) of the License Agreement are hereby deleted and replaced in their entirety as follows: (a) [*] within thirty (30) days following the dates on which the first NDA or BLA, as applicable, for a Licensed Protein Product is filed with the FDA by Connetics for [*] provided however, that such milestone payments shall only be paid once for each of the foregoing indications, and shall not be paid upon the filing of a NDA or BLA for an osteopetrosis or any mycobacterial infection indication. (b) [*] within thirty (30) days following the date Connetics receives the first FDA approval of [*] provided however, that such milestone payment shall only be paid once for each of the foregoing indications, and shall not be paid upon receipt of FDA approval for commercial sale for an osteopetrosis or any mycobacterial infection indication. 15. Section 8.3 of the License Agreement is hereby deleted and replaced in its entirety as follows: 8.3 Royalties. Connetics shall pay Genentech the following royalties on Net Sales of Licensed Products by Connetics and its sublicensees: (a) For annual aggregate Net Sales of all Licensed Protein Products in the Territory (excluding Japan) [*] a royalty rate equal to [*] of such Net Sales. (b) [*] for annual aggregate Net Sales of all Licensed Protein Products in the Territory (excluding Japan) [*] a royalty rate equal to [*] of such Net Sales [*]. (c) For Net Sales of all Licensed Protein Products in Japan, a royalty rate equal to [*] of such Net Sales; provided, however, that in the event that [*] for an indication for which InterMune has exclusive rights under Section 2.1(g), the foregoing royalty rate shall be reduced to [*] for Net Sales of [*] in Japan for such indication [*]. For the sake of clarity, Net Sales of Licensed Protein Products to which Connetics acquires rights pursuant to Section 2.1(g)(iii) shall be subject to this subsection (c). (d) (i) For Net Sales of Licensed Gene Product in the Territory, where such Licensed Gene Product is used in conjunction with a Licensed Protein Product for the treatment or prevention of a given indication in a given patient *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 8 9 population, a royalty rate equal to [*] of such Net Sales. As used in this subsection (d), "indication" shall mean any particular medical condition within the Field of Use and Gene Therapy Field of Use, including but not limited to labeling claims approved by a regulatory agency. (ii) For Net Sales of Licensed Gene Product in a country in the Territory, where such Licensed Gene Product is used in a given patient population for the treatment or prevention of the same indication for which a given Licensed Protein Product is used in such patient population, a royalty rate equal to (A) [*] of such Net Sales during the [*][*] period following the first commercial sale of such Licensed Gene Product in such country for the treatment or prevention of such indication in such patient population by Connetics, or its Affiliates and sublicensees (the "First Commercial Sale"); (B) [*] of such Net Sales during the [*][*] period following the First Commercial Sale; and (C) [*] of such Net Sales beginning on the [*] anniversary of the First Commercial Sale and thereafter. (iii) Notwithstanding the provisions of subsections (i) and (ii) above, in the event that annual Net Sales of a Licensed Gene Product for the treatment or prevention of an indication in a patient population in a country in the Territory [*] for the treatment or prevention of such indication in such patient population in such country, the royalty rate thereafter applicable to Net Sales of such Licensed Gene Product for the treatment or prevention of such indication in such patient population in such country shall be [*] of such Net Sales. (iv) In the event that Connetics or InterMune determines at any point following [*] that the above royalty rates are having or are likely to have an adverse impact on Connetics' or InterMune's ability to compete effectively in its sales of such Licensed Gene Product, Connetics or InterMune shall so notify Genentech, and the Parties shall in good faith discuss and attempt to reach a reasonable and mutually agreeable resolution to the situation. (e) (i) The royalties set forth in subsections (a), (b) and (c) above shall be payable, on a country-by-country basis, until the later of: (A) the expiration or revocation of the last remaining issued patent in such country within the Genentech Patent Rights that covers Licensed Protein Products, or (B) [*] years from the Effective Date of this Agreement. Notwithstanding the foregoing, upon the expiration of the last to expire issued patent in each country within the Genentech Patent Rights during the term of this Agreement, thereafter each of the royalty rates set forth in (a), (b) and (c) above shall be reduced by [*] with respect to such country. (ii) The royalties set forth in subsection (d) above shall be payable, on a country-by-country basis, until the expiration or revocation of the last remaining issued patent in such country within the Genentech Patent Rights that covers Licensed Gene Products. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 9 10 16. Section 8.4 of the License Agreement is hereby deleted and replaced in its entirety as follows: 8.4 Third-Party Royalties. If Genentech or Connetics is required to pay any third party a royalty due to the manufacture, use, sale, offer for sale or importation of a Licensed Product in the Territory for or by Connetics or its sublicensees, Connetics shall be responsible for the payment of [*] of such third-party royalty, provided however, that Connetics may deduct from the royalties otherwise payable to Genentech under Section 8.3 above, an amount equal to [*] of such third party royalties incurred only due to use patents in the Field of Use or in the Gene Therapy Field of Use in the Territory, provided that the amount deducted shall not exceed [*] of the royalties otherwise payable by Connetics to Genentech under Section 8.3. For purposes of clarification, such deductions shall not apply to [*]. Attached hereto as Exhibit G is a list of all such royalty obligations to third parties known to Genentech as of the Effective Date without diligent search. No later than thirty (30) days from the Effective Date, Genentech shall complete a reasonable internal investigation of its records and update Exhibit G, as necessary, to accurately reflect all such royalty obligations to third parties to the best of Genentech's knowledge; provided however, Connetics acknowledges that Genentech has no obligation to conduct due diligence or any investigation with respect to third party patent rights related to Licensed Products. Genentech shall notify Connetics in writing during the term of this Agreement if it becomes aware of any additional Genentech third party royalty obligations. 17. Section 8.5 of the License Agreement is hereby deleted and replaced in its entirety as follows: 8.5 Royalty Payments. (a) Royalty payments shall be made to Genentech quarterly within ninety (90) days following the end of each calendar quarter for which royalties are due. Each royalty payment shall be accompanied by a report summarizing the total Net Sales during the relevant three-month period, and the calculation of royalties, if any, due thereon pursuant to Section 8.3. (b) Notwithstanding subsection (a) above, any royalty payments which accrue during 1999 on Net Sales of Licensed Protein Product sold by Connetics' sublicensee InterMune shall be paid to Genentech in the form of promissory note, in the form attached hereto as Exhibit I. For each calendar quarter in 1999 for which royalty payments are due, InterMune shall execute and deliver to Genentech, within ninety (90) days following the end of each such calendar quarter, a promissory note in the form of Exhibit I, and in the amount of such royalties due to Genentech for such quarter. Each such promissory note shall be accompanied by the report described in Section 8.5(a) above for such quarter. In the event that any such note is delivered by InterMune after such 90 day period, nevertheless interest shall accrue on the date that such note was due. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 10 11 18. The following provision is hereby inserted as Section 10.4 to the License Agreement: 10.4 Insurance. At all times during the term of this Agreement, Connetics and its sublicensees shall provide the following insurance at its sole cost and expense: (a) Commercial General Liability, including coverage for products and completed operations (maintained for a period of at least [*] after the expiration or termination of this Agreement) [*]. The policy shall have a limit of no less than [*] dollars. (b) Foreign Local Coverages: Where required by law, Connetics and its sublicensees will purchase foreign local coverages in an amount that, at a minimum, satisfies the legal requirements of that jurisdiction. (c) Policy Conditions: All policies under (a) and (b) above shall: (i) be written by insurance companies with an A.M. Best's rating of A:VIII or higher (or if Connetics' or its sublicensees policies are not subject to the Best rating, then by carriers who are acceptable to Genentech); and (ii) add Genentech as an additional insured. (d) Additionally, Connetics shall use its Best Efforts to obtain from its insurance carrier for the policies described in subsections (a) and (b) covenants: (i) [*]; and (ii) [*]. Connetics and its sublicensees shall provide Genentech a certificate of insurance which shall reflect the above coverages and provisions, with annual renewals as long as the contract continues. 19. Section 11.1 of the License Agreement is hereby deleted and replaced in its entirety as follows: 11.1 Term. This Agreement shall commence on the Effective Date of this Agreement and, unless terminated earlier, shall expire: (a) With respect to Licensed Protein Products, at the later to occur of (i) the expiration of the last to expire of any Genentech Patent Rights covering a Licensed Protein Product, or (ii) twenty (20) years from the Effective Date of this Agreement; and *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 11 12 (b) With respect to Licensed Gene Products, at the expiration of the last to expire of any Genentech Patent Rights covering a Licensed Gene Product; provided, however, that in the event that either the CMCC License or the Biogen License is terminated, the licenses granted by Genentech to Connetics under the CMCC License or the Biogen License shall also terminate. Genentech shall use its Best Efforts to keep the CMCC License and the Biogen License in effect during the term of this Agreement, [*]. One (1) year before the expiration of this Agreement under Section 11.1(a), the Parties agree to meet and to discuss in good faith extending the term of this Agreement with respect to Licensed Protein Products on terms mutually agreeable to the Parties. 20. Exhibit E of the License Agreement is hereby deleted and replaced in its entirety with new Exhibit E attached hereto and incorporated herein. 21. In consideration for the rights granted to Connetics and its sublicensees under this Amendment, [*]. 22. This Amendment supersedes the Letter Agreement in its entirety. All other terms and provisions of the License Agreement, including all exhibits to that Agreement, will continue in full force and effect as though fully set forth in this Amendment. Nothing in this Amendment shall be construed as affecting Connetics' obligations to be liable and responsible for the performance of all of the obligations of Connetics and its sublicensees under the License Agreement. THIS SPACE INTENTIONALLY LEFT BLANK *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 12 13 IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by the respective duly authorized officers as of the date first written above. GENENTECH, INC. CONNETICS CORPORATION By: /s/ Nicholas Simon By: /s/ T. Wiggans ------------------------------- -------------------------------- Printed Name: Nicholas Simon Printed Name: Thomas G. Wiggans ---------------------- ---------------------- Title: Title: President & CEO ------------------------------ ----------------------------- Acknowledged and agreed as to InterMune's rights and obligations hereunder as Connetics' sublicensee under the License Agreement: INTERMUNE PHARMACEUTICALS, INC. By: /s/ S. Harkonen ---------------------------------- Printed Name: W. Scott Harkonen ------------------------ Title: Chief Executive Officer ------------------------------- 13 14 EXHIBIT E CLINICAL DEVELOPMENT MILESTONES [*] *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 14 EX-10.5 6 RESTRICTED COMMON STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.5 CONNETICS CORPORATION RESTRICTED COMMON STOCK PURCHASE AGREEMENT MARCH 9, 1999 This Common Stock Purchase Agreement (the "Agreement") is entered into as of this 9th day of March, 1999, between Connetics Corporation, a Delaware corporation (the "Company") and G. Kirk Raab, an individual ("Purchaser"). SECTION 1 SALE OF COMMON STOCK 1.1 Sale of Common Stock. Subject to the terms and conditions hereof, on the Closing Date, as defined below, the Company will issue and sell to Purchaser, and Purchaser will purchase from the Company, an aggregate of 25,000 shares of Common Stock, par value $0.001 per share, of the Company (the "Common Stock"), for an aggregate purchase price of $2,500. 1.2 Closing Date. The closing (the "Closing") of the purchase and sale of the Common Stock shall be held at the offices of the Company, 3400 West Bayshore Road, Palo Alto, California at 10:00 a.m. on March 30, 1999 or at such other time and place upon which the Company and Purchaser shall mutually agree (the date of the Closing is referred to as the "Closing Date"). 1.3 Delivery. At the Closing, the Company will deliver to Purchaser a certificate or certificates representing the shares of Common Stock purchased by Purchaser, against payment of the purchase price therefor, by wire transfer or check drawn on a United States bank. 1.4 Legend. The certificate(s) for the Common Stock shall be subject to a legend restricting transfer under the Securities Act of 1933, as amended (the "SECURITIES ACT") and referring to restrictions on transfer herein, such legend to be substantially as follows: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (A) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, OR (B) AN OPINION OF COUNSEL FOR THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR (C) FULL COMPLIANCE WITH THE PROVISIONS OF RULE 144 UNDER THE ACT." 2 1.5 Removal of Legends. Any legend endorsed on a certificate pursuant to SECTION 1.4 of this Agreement shall be removed (a) if the shares of the Common Stock represented by such certificate shall have been effectively registered under the Securities Act or otherwise lawfully sold in a public transaction, (b) if such shares may be transferred in compliance with Rule 144(k) promulgated under the Securities Act, or (c) if the holder of such shares shall have provided the Company with an opinion of counsel, in form and substance acceptable to the Company, stating that a public sale, transfer or assignment of such shares may be made without registration. SECTION 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the Purchaser that: 2.1 Organization. The Company is a corporation duly organized and validly existing under the laws of the State of Delaware and is in good standing under such laws. The Company has requisite corporate power and authority to own, lease and operate its properties and assets, and to carry on its business as presently conducted. 2.2 Authorization. The Company has all corporate right, power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of this Agreement by the Company, and the authorization, sale, issuance and delivery of the Common Stock and the performance of the Company's obligations under this Agreement has been taken. This Agreement has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy. There are no statutory, contractual or other preemptive rights or rights of first refusal with respect to the issuance and sale of the Common Stock. 2.3 Validity of Securities. The Common Stock, when issued, sold and delivered by the Company in accordance with the terms of this Agreement, will be duly and validly issued, fully-paid and nonassessable. Based in part upon the representations of the Purchaser in this Agreement, the offer, sale and issuance of the Common Stock will be made in compliance with all applicable federal and state securities laws. 2.4 No Conflict. The execution and delivery of this Agreement does not, and the sale of the Common Stock will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or to a loss of a material benefit, under, any provision of the Certificate of Incorporation or Bylaws of the Company or any agreement or instrument, permit, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the 3 Company, its properties or assets, if to do so would have a material adverse effect on the business, properties, prospects or financial condition of the Company. 2.5 Accuracy of Reports; Financial Statements. All reports required to be filed with the Securities and Exchange Commission (the "SEC") by the Company from February 1, 1996 (the date of the Company's initial public offering) through the date of this Agreement under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), copies of which have been made available to Purchaser (the "SEC DOCUMENTS"), have been duly and timely filed, were in substantial compliance with the requirements of their respective forms when filed, were complete and correct in all material respects as of the dates at which the information was furnished, and contained (as of such dates) no untrue statement of a material fact nor omitted to state a material fact necessary in order to make the statements made therein in light of the circumstances in which made not misleading. The Company's financial statements included in the SEC Documents (the "FINANCIAL STATEMENTS") comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto. The Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied and fairly present the consolidated financial position of the Company and any subsidiaries at the dates thereof and the consolidated results of operations and consolidated cash flows for the periods then ended (subject, in the case of unaudited statements, to normal, recurring adjustments). 2.6 Governmental Consents, Etc. No consent, approval or authorization of or designation, declaration or filing with any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, or the consummation of any other transaction contemplated by this Agreement, except such filings as may be required to be made with the SEC, the National Association of Securities Dealers, Inc. ("NASD") and with governmental authorities for purposes of effecting compliance with the securities and Blue Sky laws in the states in which Common Stock is offered and/or sold, which compliance will be effected in accordance with such laws. 2.7 Registration Rights. The Company has not granted or agreed to grant any rights to register its securities under the Securities Act, including piggy-back rights, to Purchaser. 2.8 Rights of Common Stock. The Common Stock shall have the rights, preferences, privileges and restrictions provided in the Company's Amended and Restated Certificate of Incorporation. SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER Purchaser hereby represents and warrants to the Company as follows: 3.1 Investment. Purchaser is acquiring the Common Stock for investment for his own account, not as a nominee or agent and not with a view to or for resale in connection with any distribution thereof. Purchaser understands that the Common Stock purchased from the 4 Company pursuant to this Agreement has not been registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of Purchaser's investment intent and the accuracy of such Purchaser's representations as expressed in this Agreement. Purchaser acknowledges and understands that the securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Purchaser further acknowledges and understands that the Company is under no obligation to register the securities. Purchaser understands that the certificate(s) evidencing the securities will be imprinted with a legend that prohibits the transfer of the securities unless they are registered or such registration is not required in the opinion of counsel for the Company. 3.2 Accredited Investor. Purchaser is an "accredited investor" as defined by Rule 501(a) under the Securities Act. The SEC Documents have been made available to Purchaser, and Purchaser has received all the information it has requested regarding the Company. Purchaser has such business and financial experience as is required to give him the capacity to protect his own interests in connection with the purchase of the Common Stock. 3.3 Authority. This Agreement has been duly executed and delivered by Purchaser and constitutes a legal, valid and binding obligation of the Purchaser, enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated by this Agreement will not, conflict with or result in any violation of any obligation under any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Purchaser. 3.4 Investigation. Purchaser has had a reasonable opportunity to discuss the Company's business, management and financial affairs with the Company's management, and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the securities. 3.5 Tax Consequences. Purchaser understands that he may suffer adverse tax consequences as a result of the purchase or disposition of the Common Stock. Purchaser represents that he has consulted any tax consultants he deems advisable in connection with the purchase or disposition of the Common Stock and that Purchaser is not relying on the Company for any tax advice. 3.6 Section 83(b) Election. (a) Purchaser understands that Section 83(a) of the Internal Revenue Code of 1986, as amended (the "CODE"), taxes as ordinary income the difference between the amount paid for the Common Stock and the fair market value of the Common Stock. Purchaser understands that Purchaser may elect to be taxed at the time the Common Stock is purchased by filing an election under Section 83(b) (an "83(b) ELECTION") of the Code with the Internal Revenue Service within 30 days after the date of purchase. Even if the fair market value of the Common Stock at the time of the execution of this Agreement equals the amount paid for the Common Stock, the election must be made to avoid income and alternative minimum tax 5 treatment under Section 83(a) in the future. Purchaser understands that failure to file such an election in a timely manner may result in adverse tax consequences for Purchaser. Purchaser further understands that an additional copy of such election form should be filed with his federal income tax return for the calendar year in which the date of this Agreement falls. (b) Purchaser acknowledges that the foregoing is only a summary of the effect of United States federal income taxation with respect to purchase of the Common Stock under this Agreement, and does not purport to be complete. Purchaser further acknowledges that the Company has directed Purchaser to seek independent advice regarding the applicable provisions of the Code, the income tax laws of any municipality, state, or foreign country in which Purchaser may reside, and the tax consequences of Purchaser's death. (c) Purchaser agrees that he will execute and deliver to the Company with this executed Agreement a copy of the Acknowledgment and Statement of Decision Regarding Section 83(b) Election (the "ACKNOWLEDGMENT") attached to this Agreement as EXHIBIT A. Purchaser further agrees that he will execute and submit with the Acknowledgment a copy of the 83(b) Election attached to this Agreement as EXHIBIT B if Purchaser has indicated in the Acknowledgment his decision to make such an election. SECTION 4 CONDITIONS TO OBLIGATIONS OF THE PURCHASER Purchaser's obligations to the Company under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived: 4.1 Representations and Warranties Correct. The representations and warranties made by the Company in SECTION 2 shall be true and correct in all material respects on the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date. 4.2 No Law Prohibiting or Restricting Sale. There shall not be in effect any law, rule or regulation prohibiting or restricting such sale, or requiring any consent or approval of any person which shall not have been obtained to issue the Common Stock (except as otherwise referenced in this Agreement). SECTION 5 CONDITIONS TO OBLIGATIONS OF THE COMPANY The obligations of the Company under this Agreement are subject to the fulfillment on or prior to the Closing of each of the following conditions, unless otherwise waived: 5.1 Representations and Warranties Correct. The representations and warranties made by the Purchaser in SECTION 3 of this Agreement shall be true and correct in all material 6 respects on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date. 5.2 No Order Pending. There shall not then be in effect any order enjoining or restraining the transactions contemplated by this Agreement. 5.3 No Law Prohibiting or Restricting Such Sale. There shall not be in effect any law, rule or regulation prohibiting or restricting such sale, or requiring any consent or approval of any person which shall not have been obtained to issue the Common Stock (except as otherwise provided in this Agreement). SECTION 6 MISCELLANEOUS 6.1 Governing Law. This Agreement and all acts and transactions pursuant to this Agreement and the rights and obligations of the parties to this Agreement shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. 6.2 Survival. Unless otherwise set forth in this Agreement, the warranties, representations and covenants of the Company and Purchaser contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing. 6.3 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties to this Agreement and their respective successors and assigns. 6.4 Entire Agreement; Amendment. This Agreement and the other documents delivered pursuant to this Agreement constitute the full and entire understanding and agreement between the parties with regard to the subject matter hereof and supersede all prior agreements and understandings among the parties relating to the subject matter of this Agreement. Neither this Agreement nor any of its terms may be amended, waived, discharged or terminated other than by a written instrument signed by the party against which enforcement of any such amendment, waiver, discharge or termination is sought. 6.5 Notices and Dates. Unless otherwise provided in this Agreement, any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or by overnight courier and addressed to the party to be notified at such party's address as set forth on the signature page to this Agreement or as subsequently modified by written notice. If any date provided for in this Agreement falls on a Saturday, Sunday or legal holiday, such date shall be deemed extended to the next business day. 6.6 Brokers. Neither Purchaser nor the Company has engaged, consented to or authorized any broker, finder or intermediary to act on his or its behalf, directly or indirectly, as a broker, finder or intermediary in connection with the transactions contemplated by this Agreement. Each of the Company and the Purchaser agree to indemnify and hold harmless the 7 other party from and against all fees, commissions or other payments owing to any party acting on his or its behalf. 6.7 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 6.8 Captions and Headings. The captions and headings used herein are for convenience and ease of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 6.9 Counterparts. This Agreement may be executed in counterparts, and each such counterpart shall be deemed an original for all purposes. IN WITNESS WHEREOF, the parties to this Agreement have executed or caused their respective authorized officers to execute this Agreement as of the first date written above. "COMPANY" Connetics Corporation Address: By: /s/ T. Wiggans 3400 West Bayshore Road ------------------------------------- Palo Alto, California 94303 Thomas G. Wiggans Facsimile: (650) 843-2899 President and Chief Executive Officer "PURCHASER" /s/ G. Kirk Raab ------------------------------------- G. Kirk Raab 314 Wyndham Drive Portola Valley, CA 94028 EX-10.6 7 RESTRICTED COMMON STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.6 CONNETICS CORPORATION RESTRICTED COMMON STOCK PURCHASE AGREEMENT MARCH 9, 1999 This Common Stock Purchase Agreement (the "Agreement") is entered into as of this 9th day of March, 1999, between Connetics Corporation, a Delaware corporation (the "Company") and Thomas G. Wiggans, an individual ("Purchaser"). SECTION 1 SALE OF COMMON STOCK 1.1 Sale of Common Stock. Subject to the terms and conditions hereof, on the Closing Date, as defined below, the Company will issue and sell to Purchaser, and Purchaser will purchase from the Company, an aggregate of 25,000 shares of Common Stock, par value $0.001 per share, of the Company (the "Common Stock"), for an aggregate purchase price of $2,500. 1.2 Closing Date. The closing (the "Closing") of the purchase and sale of the Common Stock shall be held at the offices of the Company, 3400 West Bayshore Road, Palo Alto, California at 10:00 a.m. on March 30, 1999 or at such other time and place upon which the Company and Purchaser shall mutually agree (the date of the Closing is referred to as the "Closing Date"). 1.3 Delivery. At the Closing, the Company will deliver to Purchaser a certificate or certificates representing the shares of Common Stock purchased by Purchaser, against payment of the purchase price therefor, by wire transfer or check drawn on a United States bank. 1.4 Legend. The certificate(s) for the Common Stock shall be subject to a legend restricting transfer under the Securities Act of 1933, as amended (the "SECURITIES ACT") and referring to restrictions on transfer herein, such legend to be substantially as follows: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (A) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, OR (B) AN OPINION OF COUNSEL FOR THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR (C) FULL COMPLIANCE WITH THE PROVISIONS OF RULE 144 UNDER THE ACT." 2 1.5 Removal of Legends. Any legend endorsed on a certificate pursuant to SECTION 1.4 of this Agreement shall be removed (a) if the shares of the Common Stock represented by such certificate shall have been effectively registered under the Securities Act or otherwise lawfully sold in a public transaction, (b) if such shares may be transferred in compliance with Rule 144(k) promulgated under the Securities Act, or (c) if the holder of such shares shall have provided the Company with an opinion of counsel, in form and substance acceptable to the Company, stating that a public sale, transfer or assignment of such shares may be made without registration. SECTION 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the Purchaser that: 2.1 Organization. The Company is a corporation duly organized and validly existing under the laws of the State of Delaware and is in good standing under such laws. The Company has requisite corporate power and authority to own, lease and operate its properties and assets, and to carry on its business as presently conducted. 2.2 Authorization. The Company has all corporate right, power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of this Agreement by the Company, and the authorization, sale, issuance and delivery of the Common Stock and the performance of the Company's obligations under this Agreement has been taken. This Agreement has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy. There are no statutory, contractual or other preemptive rights or rights of first refusal with respect to the issuance and sale of the Common Stock. 2.3 Validity of Securities. The Common Stock, when issued, sold and delivered by the Company in accordance with the terms of this Agreement, will be duly and validly issued, fully-paid and nonassessable. Based in part upon the representations of the Purchaser in this Agreement, the offer, sale and issuance of the Common Stock will be made in compliance with all applicable federal and state securities laws. 2.4 No Conflict. The execution and delivery of this Agreement does not, and the sale of the Common Stock will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or to a loss of a material benefit, under, any provision of the Certificate of Incorporation or Bylaws of the Company or any agreement or instrument, permit, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the 3 Company, its properties or assets, if to do so would have a material adverse effect on the business, properties, prospects or financial condition of the Company. 2.5 Accuracy of Reports; Financial Statements. All reports required to be filed with the Securities and Exchange Commission (the "SEC") by the Company from February 1, 1996 (the date of the Company's initial public offering) through the date of this Agreement under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), copies of which have been made available to Purchaser (the "SEC DOCUMENTS"), have been duly and timely filed, were in substantial compliance with the requirements of their respective forms when filed, were complete and correct in all material respects as of the dates at which the information was furnished, and contained (as of such dates) no untrue statement of a material fact nor omitted to state a material fact necessary in order to make the statements made therein in light of the circumstances in which made not misleading. The Company's financial statements included in the SEC Documents (the "FINANCIAL STATEMENTS") comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto. The Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied and fairly present the consolidated financial position of the Company and any subsidiaries at the dates thereof and the consolidated results of operations and consolidated cash flows for the periods then ended (subject, in the case of unaudited statements, to normal, recurring adjustments). 2.6 Governmental Consents, Etc. No consent, approval or authorization of or designation, declaration or filing with any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, or the consummation of any other transaction contemplated by this Agreement, except such filings as may be required to be made with the SEC, the National Association of Securities Dealers, Inc. ("NASD") and with governmental authorities for purposes of effecting compliance with the securities and Blue Sky laws in the states in which Common Stock is offered and/or sold, which compliance will be effected in accordance with such laws. 2.7 Registration Rights. The Company has not granted or agreed to grant any rights to register its securities under the Securities Act, including piggy-back rights, to Purchaser. 2.8 Rights of Common Stock. The Common Stock shall have the rights, preferences, privileges and restrictions provided in the Company's Amended and Restated Certificate of Incorporation. SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER Purchaser hereby represents and warrants to the Company as follows: 3.1 Investment. Purchaser is acquiring the Common Stock for investment for his own account, not as a nominee or agent and not with a view to or for resale in connection with any distribution thereof. Purchaser understands that the Common Stock purchased from the 4 Company pursuant to this Agreement has not been registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of Purchaser's investment intent and the accuracy of such Purchaser's representations as expressed in this Agreement. Purchaser acknowledges and understands that the securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Purchaser further acknowledges and understands that the Company is under no obligation to register the securities. Purchaser understands that the certificate(s) evidencing the securities will be imprinted with a legend that prohibits the transfer of the securities unless they are registered or such registration is not required in the opinion of counsel for the Company. 3.2 Accredited Investor. Purchaser is an "accredited investor" as defined by Rule 501(a) under the Securities Act. The SEC Documents have been made available to Purchaser, and Purchaser has received all the information it has requested regarding the Company. Purchaser has such business and financial experience as is required to give him the capacity to protect his own interests in connection with the purchase of the Common Stock. 3.3 Authority. This Agreement has been duly executed and delivered by Purchaser and constitutes a legal, valid and binding obligation of the Purchaser, enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated by this Agreement will not, conflict with or result in any violation of any obligation under any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Purchaser. 3.4 Investigation. Purchaser has had a reasonable opportunity to discuss the Company's business, management and financial affairs with the Company's management, and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the securities. 3.5 Tax Consequences. Purchaser understands that he may suffer adverse tax consequences as a result of the purchase or disposition of the Common Stock. Purchaser represents that he has consulted any tax consultants he deems advisable in connection with the purchase or disposition of the Common Stock and that Purchaser is not relying on the Company for any tax advice. 3.6 Section 83(b) Election. (a) Purchaser understands that Section 83(a) of the Internal Revenue Code of 1986, as amended (the "CODE"), taxes as ordinary income the difference between the amount paid for the Common Stock and the fair market value of the Common Stock. Purchaser understands that Purchaser may elect to be taxed at the time the Common Stock is purchased by filing an election under Section 83(b) (an "83(b) ELECTION") of the Code with the Internal Revenue Service within 30 days after the date of purchase. Even if the fair market value of the Common Stock at the time of the execution of this Agreement equals the amount paid for the Common Stock, the election must be made to avoid income and alternative minimum tax 5 treatment under Section 83(a) in the future. Purchaser understands that failure to file such an election in a timely manner may result in adverse tax consequences for Purchaser. Purchaser further understands that an additional copy of such election form should be filed with his federal income tax return for the calendar year in which the date of this Agreement falls. (b) Purchaser acknowledges that the foregoing is only a summary of the effect of United States federal income taxation with respect to purchase of the Common Stock under this Agreement, and does not purport to be complete. Purchaser further acknowledges that the Company has directed Purchaser to seek independent advice regarding the applicable provisions of the Code, the income tax laws of any municipality, state, or foreign country in which Purchaser may reside, and the tax consequences of Purchaser's death. (c) Purchaser agrees that he will execute and deliver to the Company with this executed Agreement a copy of the Acknowledgment and Statement of Decision Regarding Section 83(b) Election (the "ACKNOWLEDGMENT") attached to this Agreement as EXHIBIT A. Purchaser further agrees that he will execute and submit with the Acknowledgment a copy of the 83(b) Election attached to this Agreement as EXHIBIT B if Purchaser has indicated in the Acknowledgment his decision to make such an election. SECTION 4 CONDITIONS TO OBLIGATIONS OF THE PURCHASER Purchaser's obligations to the Company under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived: 4.1 Representations and Warranties Correct. The representations and warranties made by the Company in SECTION 2 shall be true and correct in all material respects on the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date. 4.2 No Law Prohibiting or Restricting Sale. There shall not be in effect any law, rule or regulation prohibiting or restricting such sale, or requiring any consent or approval of any person which shall not have been obtained to issue the Common Stock (except as otherwise referenced in this Agreement). SECTION 5 CONDITIONS TO OBLIGATIONS OF THE COMPANY The obligations of the Company under this Agreement are subject to the fulfillment on or prior to the Closing of each of the following conditions, unless otherwise waived: 5.1 Representations and Warranties Correct. The representations and warranties made by the Purchaser in SECTION 3 of this Agreement shall be true and correct in all material 6 respects on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date. 5.2 No Order Pending. There shall not then be in effect any order enjoining or restraining the transactions contemplated by this Agreement. 5.3 No Law Prohibiting or Restricting Such Sale. There shall not be in effect any law, rule or regulation prohibiting or restricting such sale, or requiring any consent or approval of any person which shall not have been obtained to issue the Common Stock (except as otherwise provided in this Agreement). SECTION 6 MISCELLANEOUS 6.1 Governing Law. This Agreement and all acts and transactions pursuant to this Agreement and the rights and obligations of the parties to this Agreement shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. 6.2 Survival. Unless otherwise set forth in this Agreement, the warranties, representations and covenants of the Company and Purchaser contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing. 6.3 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties to this Agreement and their respective successors and assigns. 6.4 Entire Agreement; Amendment. This Agreement and the other documents delivered pursuant to this Agreement constitute the full and entire understanding and agreement between the parties with regard to the subject matter hereof and supersede all prior agreements and understandings among the parties relating to the subject matter of this Agreement. Neither this Agreement nor any of its terms may be amended, waived, discharged or terminated other than by a written instrument signed by the party against which enforcement of any such amendment, waiver, discharge or termination is sought. 6.5 Notices and Dates. Unless otherwise provided in this Agreement, any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or by overnight courier and addressed to the party to be notified at such party's address as set forth on the signature page to this Agreement or as subsequently modified by written notice. If any date provided for in this Agreement falls on a Saturday, Sunday or legal holiday, such date shall be deemed extended to the next business day. 6.6 Brokers. Neither Purchaser nor the Company has engaged, consented to or authorized any broker, finder or intermediary to act on his or its behalf, directly or indirectly, as a broker, finder or intermediary in connection with the transactions contemplated by this Agreement. Each of the Company and the Purchaser agree to indemnify and hold harmless the 7 other party from and against all fees, commissions or other payments owing to any party acting on his or its behalf. 6.7 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 6.8 Captions and Headings. The captions and headings used herein are for convenience and ease of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 6.9 Counterparts. This Agreement may be executed in counterparts, and each such counterpart shall be deemed an original for all purposes. IN WITNESS WHEREOF, the parties to this Agreement have executed or caused their respective authorized officers to execute this Agreement as of the first date written above. "COMPANY" Connetics Corporation Address: By: /s/ John L. Higgins 3400 West Bayshore Road ------------------------------------------ Palo Alto, California 94303 John L. Higgins Facsimile: (650) 843-2899 Vice President, Finance and Administration and Chief Financial Officer "PURCHASER" /s/ T. Wiggans ------------------------------------------ Thomas G. Wiggans 1 Patricia Drive Atherton, California 94027 EX-10.7 8 COLLABORATION AGREEMENT 1 EXHIBIT 10.7 INTERMUNE PHARMACEUTICALS, INC. ---------------------------- COLLABORATION AGREEMENT ---------------------------- APRIL 27, 1999 2 INTERMUNE PHARMACEUTICALS, INC. COLLABORATION AGREEMENT THIS COLLABORATION AGREEMENT is made effective as of the 27th day of April, 1999 (the "Effective Date") by and between INTERMUNE PHARMACEUTICALS, INC., a California corporation (the "Company"), and CONNETICS CORPORATION, a Delaware corporation ("Connetics"). Each of the Company and Connetics may be referred to herein as a "Party" or together as the "Parties." RECITALS WHEREAS, as of even date herewith, the Company and Connetics have amended and restated that certain Exclusive Sublicense Agreement, dated August 21, 1998, pursuant to which, among other things, InterMune shall make certain milestone and royalty payments to Connetics; and WHEREAS, as of even date herewith, the Company and Connetics have entered into a Transition Agreement pursuant to which, among other things, Connetics shall book net revenues, expenses, and net profits of Actimmune Units for the treatment of Chronic Granulomatous Disease from January 15, 1999 through December 31, 2001; and WHEREAS, as of April 7, 1999 herewith, the Company and Connetics have amended and restated that certain Service Agreement, dated October 12, 1998 (the "Service Agreement"), pursuant to which, among other things, Connetics provides to the Company certain information services, payroll, facilities, human resources, accounting, employee benefits administration, and R&D related services; and WHEREAS, pursuant to the terms of that certain term sheet between the Company and certain of the Series A-1 and A-2 Preferred Stock investors, the Board of Directors of the Company intends to declare and pay a dividend (the "Dividend") of four million seven hundred twenty one thousand eight hundred seventy six dollars and seventy two cents ($4,721,876.72) to Connetics as the sole holder of shares of Series A Preferred Stock, following the closing of the Series A-1 and A-2 Preferred Stock financing; and WHEREAS, Connetics has delivered concurrently herewith a notice of conversion, pursuant to which, in accordance with the Company's Amended and Restated Articles of Incorporation, all of Connetics' 11,200,000 shares of Series A Preferred shall be converted into 960,000 shares of Series A-1 Preferred Stock once the Dividend has been paid to Connetics. NOW, THEREFORE, in consideration of the foregoing recitals and mutual promises hereinafter set forth, the parties hereby agree as follows: 1. 3 1. CASH PAYMENTS. 1.1 COLLABORATION AGREEMENT CASH PAYMENT. On the Effective Date, the Company shall pay to Connetics five hundred thousand dollars ($500,000) by wire transfer. 1.2 TRANSITION AGREEMENT CASH PAYMENT. On the Effective Date, the Company shall pay to Connetics one hundred fifty three thousand six hundred fifty five dollars ($153,655) by wire transfer as payment representing the Actimmune Gross Margin for the period from January 15, 1999 to the Effective Date, pursuant to Section 2.3(c) of the Transition Agreement. 1.3 AMENDED AND RESTATED SERVICE AGREEMENT CASH PAYMENT. On the Effective Date, the Company shall pay to Connetics two hundred two thousand nine hundred eighty nine dollars ($202,989) by wire transfer as payment for services provided from January 1, 1999, through March 31, 1999 under the Service Agreement. 1.4 REIMBURSEMENT FOR PREPAID EXPENSES. On the Effective Date, the Company shall pay to Connetics fifty one thousand eight hundred thirty dollars ($51,830) by wire transfer as payment for the prepaid expenses provided from January 1, 1999, through March 31, 1999. 2. CONVERSION OF SERIES A PREFERRED INTO SERIES A-1 PREFERRED. 2.1 CONVERSION NOTICE. Connetics shall deliver, concurrent with the execution of this Agreement, a notice of conversion of all of Connetics' 11,200,000 shares of Series A Preferred Stock into an aggregate of 960,000 shares of Series A-1 Preferred Stock. Such notice shall be in the form attached hereto as EXHIBIT A (the "Conversion Notice"). 2.2 CONVERSION. Promptly following payment of the dividend declared by the Board of Directors of the Company to Connetics, Connetics shall deliver to the Company its Series A Preferred Stock certificate. The Company shall then convert the Series A Preferred Stock into Series A-1 Preferred Stock in accordance with Article III.E.1 of the Company's Amended and Restated Articles of Incorporation. 3. COMMITMENT TO PAY CASH OR ISSUE PROMISSORY NOTE. 3.1 COMMITMENT. On March 31, 2001, the Company shall, in its sole discretion, either pay to Connetics (i) five hundred thousand dollars ($500,000.00) by check or by wire transfer or (ii) two hundred thousand dollars ($200,000) by check or by wire transfer and deliver a promissory note in the form attached hereto as EXHIBIT B (the "Note"). 3.2 PROMISSORY NOTE. The Note will be due and payable in two principal payments of $150,000 each with the first payment on or before June 30, 2001, and the second payment on or before September 30, 2001. 2. 4 3.3 MILESTONE PAYMENT. The Company shall pay to Connetics a milestone payment of one million five hundred thousand dollars ($1,500,000) in the form and at the times set forth in Section 5.2 of the Amended and Restated Exclusive Sublicense Agreement. 4. ISSUANCE OF SERIES B PREFERRED. 4.1 SERIES B PREFERRED. Effective upon the closing of the Company's Series B Preferred Stock Financing (the "Series B Financing"), the Company shall issue to Connetics shares of Series B Preferred Stock (the "Series B Preferred") in an amount equal to the quotient of five hundred thousand dollars ($500,000) divided by the price per share of Series B Preferred paid by the purchasers of the Series B Preferred. The Company shall use its best efforts to assure that the terms, conditions, rights, preferences and privileges of the Series B Preferred issued to Connetics by the Company in the Series B Financing shall be the same as those of the Series B Preferred issued to the other purchasers, provided however, that such efforts shall not require the Company to accept a lower price per share or make other material concessions to the other purchasers of the Series B Preferred. Notwithstanding the foregoing, in the event of either a Company Sale (as defined below) or a firm underwritten public offering of the Company's Common Stock either of which occurs prior to a Series B Financing, the Company shall, in its sole discretion, either (i) deliver to Connetics five hundred thousand dollars ($500,000) by check or wire transfer or (ii) issue to Connetics four hundred thousand (400,000) shares of Series A-2 Preferred Stock concurrently with the closing of such Company Sale or public offering. 4.2 COMPANY SALE. For the purposes of this Agreement, a "Company Sale" shall mean (a) any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation after which fifty percent (50%) or more of the voting securities of the surviving corporation is held by persons who were not stockholders of the Company immediately prior to such reorganization, reclassification, consolidation, or (b) the sale of all or substantially all of the Company's assets or of any successor corporation's property and assets to any other corporation or corporations, including, without limitation, a sale, assignment, transfer or termination in any manner in whole or in part of the License Agreement(s) between the Company and Connetics, Genentech and U.C. Davis and/or patent rights described in the License Agreement. 5. ISSUANCE OF SERIES C PREFERRED 5.1 SERIES C PREFERRED. In addition to and not in lieu of Section 4.1, effective upon the closing of the Company's Series C Preferred Stock Financing (the "Series C Financing"), the Company shall issue shares to Connetics of Series C Preferred Stock (the "Series C Preferred") in an amount equal to the quotient of one million dollars ($1,000,000) divided by the price per share of Series C Preferred paid by the purchasers of the Series C Preferred. The Company shall use its best efforts to assure that the terms, conditions, rights, preferences and privileges of the Series C Preferred issued to Connetics by the Company in the Series C Financing shall be same as those of the Series C Preferred issued to the other purchasers, provided however, that such efforts shall not require the Company to accept a lower price per share or make other material concessions to the other purchasers of the Series C Preferred. Notwithstanding the foregoing, in 3. 5 the event of either a Company Sale or a firm underwritten public offering of the Company's Common Stock either of which occurs prior to the Series B Financing or Series C Financing (if the Series B Financing has occurred), the Company shall, in its sole discretion, either (i) deliver to Connetics one million dollars ($1,000,000) or (ii) issue to Connetics either eight hundred thousand (800,000) shares of Series A-2 Preferred Stock (if the Series B Financing has not occurred) or that number of shares of Series B Preferred in an amount equal to one million dollars ($1,000,000) divided by the price paid per share for the Series B Preferred in the Series B Financing, concurrently with the closing of such Company Sale or public offering . 6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY The Company hereby represents and warrants to Connetics as follows: 6.1 CORPORATE POWER. The Company has all requisite corporate power to execute and deliver this Agreement and to carry out and perform its obligations under the terms of this Agreement. 6.2 AUTHORIZATION. All corporate action on the part of the Company and its Board of Directors necessary for the authorization, execution, delivery and performance of this Agreement by the Company and the performance of the Company's obligations hereunder has been taken, except for the authorization and reservation of the Series B Preferred and Series C Preferred. This Agreement and the Note, when executed and delivered by the Company, shall constitute valid and binding obligations of the Company enforceable in accordance with their terms, subject to laws of general application relating to bankruptcy, insolvency, the relief of debtors and, with respect to rights to indemnity, subject to federal and state securities laws. The Series B Preferred and Series C Preferred of the Company, when issued in compliance with the provisions of this Agreement, will be validly issued, fully paid and nonassessable and free of any liens or encumbrances, other than restrictions on transfer under the applicable state and federal securities laws. 6.3 OFFERING. Assuming the accuracy of the representations and warranties of Connetics contained in Section 5 hereof, the issuance of the Note will be exempt from the registration and prospectus delivery requirements of the Securities Act of 1933, as amended (the "1933 Act"), and has been registered or qualified (or are exempt from registration and qualification) under the registration, permit, or qualification requirements of all applicable state securities laws. 7. REPRESENTATIONS AND WARRANTIES OF CONNETICS 7.1 PURCHASE FOR OWN ACCOUNT. Connetics represents that it shall be acquiring the Note, the Series B Preferred and Series C Preferred solely for its own account and beneficial interest for investment and not for sale or with a view to distribution of the Note, Series B Preferred and Series C Preferred or any part thereof, has no present intention of selling (in connection with a distribution or otherwise), granting any participation in, or otherwise distributing the same, and does not presently have reason to anticipate a change in such intention. 4. 6 7.2 INFORMATION AND SOPHISTICATION. Connetics acknowledges that it has received all the information it has requested from the Company and it considers necessary or appropriate for deciding whether to acquire the Note, the Series B Preferred, and Series C Preferred. Connetics represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Note, the Series B Preferred, and the Series C Preferred, and to obtain any additional information necessary to verify the accuracy of the information given Connetics. Connetics further represents that it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risk of this investment. 7.3 ABILITY TO BEAR ECONOMIC RISK. Connetics acknowledges that investment in the Note, the Series B Preferred and Series C Preferred involves a high degree of risk, and represents that it is able, without materially impairing its financial condition, to hold the Note, the Series B Preferred and the Series C Preferred for an indefinite period of time and to suffer a complete loss of its investment. 7.4 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the representations set forth above, Connetics further agrees not to make any disposition of all or any portion of the Note, the Series B Preferred and the Series C Preferred unless and until: (a) There is then in effect a registration statement under the 1933 Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) Connetics shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and if reasonably requested by the Company, Connetics shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration under the 1933 Act or any applicable state securities laws. (c) Notwithstanding the provisions of paragraphs (a) and (b) above, no such registration statement or opinion of counsel shall be necessary for a transfer by Connetics to a shareholder or partner (or retired partner) of such Connetics, or transfers by gift, will or intestate succession to any spouse or lineal descendants or ancestors, if all transferees agree in writing to be subject to the terms hereof to the same extent as if they were Connetics hereunder. 7.5 EXPERIENCE. Connetics is an "accredited" investor as such term is defined in Rule 501 under the Securities Act. 7.6 FURTHER ASSURANCES. Connetics agrees and covenants that at any time and from time to time it will promptly execute and deliver to the Company such further instruments and documents and take such further action as the Company may reasonably require in order to carry out the full intent and purpose of this Agreement. 5. 7 7.7 INSURANCE. Connetics agrees and covenants that the Company shall be covered as an insured party under Connetics' general liability and products liability policy until May 31, 1999. 8. CONFIDENTIALITY. 8.1 CONFIDENTIAL INFORMATION OBLIGATIONS. As used herein, "Confidential Information" means all information that a Party discloses to the other Party under this Agreement, provided that "Confidential Information" shall not include such information excluded under Section 8.2. Except to the extent expressly authorized by this Agreement or otherwise agreed in writing by the Parties, each Party agrees that, during the term of this Agreement and for five (5) years after the expiration or termination of this Agreement, it shall keep confidential and shall not publish or otherwise disclose and shall not use for any purpose other than as provided for in this Agreement any Confidential Information furnished to it by the other Party pursuant to this Agreement. 8.2 EXCEPTIONS. The obligations set forth in Section 8.1 shall not apply to any Information that the receiving Party can demonstrate by competent evidence: (a) was already known to the receiving Party, other than under an obligation of confidentiality, at the time of disclosure by the other Party; (b) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving Party by the other Party; (c) became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving Party in breach of this Agreement; (d) was disclosed to the receiving Party, other than under an obligation of confidentiality to a third Party, by a third Party who had no obligation to the disclosing Party not to disclose such information to others; or (e) is independently developed by the receiving Party without using any of the other Party's Confidential Information. 8.3 PERMITTED DISCLOSURE. Notwithstanding the limitations in this Section 8, each Party may disclose Confidential Information belonging to the other Party (or otherwise subject to this Section 8), to the extent such disclosure is reasonably necessary in the following instances, but solely for the limited purpose of such necessity: (a) regulatory and tax filings; (b) prosecuting or defending litigation; 6. 8 (c) complying with applicable governmental laws or regulations or valid court orders; or (d) disclosure to affiliates, employees, consultants or agents who agree to be bound by similar terms of confidentiality and non-use at least equivalent in scope to those set forth in this Section 8. Notwithstanding the foregoing, in the event a Party is required to make a disclosure of the other Party's Confidential Information pursuant to Section 8.3, it will give reasonable advance notice to the other Party of such disclosure and endeavor in good faith to secure confidential treatment of such information. In any event, the Parties agree to take all reasonable action to avoid disclosure of Confidential Information hereunder. Further, the Parties agree to consult with one another on the provisions of this Agreement to be redacted in any filings made by a Party with the United States Securities and Exchange Commission or as otherwise required by law. 9. MISCELLANEOUS 9.1 BINDING AGREEMENT. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any third party any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 9.2 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California, as such laws are applied to agreements among California residents, made and to be performed entirely within the State of California. 9.3 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 9.4 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 9.5 NOTICES. Any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery or upon two (2) days after deposit with the United States Post Office, postage prepaid, addressed to the Company, or to Connetics at its address at 3400 West Bayshore Road, Palo Alto, CA 94303, or at such other address as such Party may designate by ten (10) days advance written notice to the other Party. 9.6 MODIFICATION; WAIVER. No modification or waiver of any provision of this Agreement or consent to departure therefrom shall be effective unless in writing and approved by the Company and Connetics. 7. 9 9.7 INDEPENDENT COUNSEL. Connetics acknowledges that this Agreement has been prepared on behalf of the Company by Cooley Godward LLP, counsel to the Company, and that Cooley Godward LLP does not represent, and is not acting on behalf of, Connetics. Connetics has been provided with an opportunity to consult with its own counsel with respect to this Agreement. 9.8 ENTIRE AGREEMENT. This Agreement and the Exhibits hereto, the Transition Agreement, the Amended and Restated Exclusive Sublicense Agreement, and the Amended and Restated Service Agreement (collectively, the "Intercompany Agreements") constitute the full and entire understanding and agreement between the parties with regard to the subjects of the Intercompany Agreements and no Party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth in the Intercompany Agreements. 8. 10 IN WITNESS WHEREOF, the parties have executed this COLLABORATION AGREEMENT as of the date first written above. INTERMUNE PHARMACEUTICALS, INC. By: /s/ Scott Harkonen -------------------------------- Print Name: Scott Harkonen --------------------------- Title: Chief Executive Officer -------------------------------- CONNETICS CORPORATION By: /s/ T. G. Wiggans -------------------------------- Print Name: Thomas G. Wiggans Title: President and Chief Executive Officer -------------------------------- COLLABORATION AGREEMENT SIGNATURE PAGE 11 EXHIBIT A FORM OF CONVERSION NOTICE 12 FORM OF CONVERSION NOTICE April ___, 1999 InterMune Pharmaceuticals, Inc. 3294 West Bayshore Road Palo Alto, CA 94303 RE: CONVERSION OF SERIES A PREFERRED STOCK INTO SERIES A-1 PREFERRED STOCK In accordance with Article III.E.1 of the Amended and Restated Articles of Incorporation of InterMune Pharmaceuticals, Inc. (the "Company"), Connetics Corporation hereby gives irrevocable notice of its election to convert its shares of Series A Preferred Stock into shares of Series A-1 Preferred Stock. Enclosed please find a copy of the Series A Preferred Stock certificate PA-1 evidencing ownership by Connetics Corporation of 11,200,000 shares of Series A Preferred Stock of the Company (the "Stock Certificate"), which Stock Certificate shall be delivered to the Company upon payment of the dividend referenced in the recitals of the Collaboration Agreement. Upon the closing of the Series A-1 and A-2 Preferred Stock financing and receipt of the original Stock Certificate, please deliver the certificate for 960,000 shares of Series A-1 Preferred Stock to Connetics Corporation at the address shown on the Company's record books. Sincerely, Connetics Corporation By: --------------------------------- Name: --------------------------------- Title: --------------------------------- 13 EXHIBIT B FORM OF PROMISSORY NOTE 14 PROMISSORY NOTE $300,000.00 March 31, 2001 Palo Alto, California For value received INTERMUNE PHARMACEUTICALS, INC., a California corporation ("Payor") promises to pay to Connetics Corporation or its assigns ("HOLDER") the principal sum of $300,000.00 with interest on the outstanding principal amount at the prime rate plus two percent (2%) per annum. Interest shall commence with the date hereof and shall continue on the outstanding principal until paid in full. 1. This note (the "Note") is issued to the Holder pursuant to the terms of that certain Agreement dated as of April ___, 1999 between the Company and the Holders. 2. All payments of interest and principal shall be in lawful money of the United States of America. All payments shall be applied first to accrued interest, and thereafter to principal. 3. $150,000 of the outstanding principal balance and all unpaid accrued interest shall become fully due and payable on June 30, 2001, and $150,000 of the outstanding principal balance and all unpaid accrued interest shall become due and payable on September 30, 2001. 4. In the event of any default hereunder, Payor shall pay all reasonable attorneys' fees and court costs incurred by Holder in enforcing and collecting this Note. 5. Payor hereby waives demand, notice, presentment, protest and notice of dishonor. 6. The terms of this Note shall be construed in accordance with the laws of the State of California, as applied to contracts entered into by California residents within the State of California, which contracts are to be performed entirely within the State of California. 7. Any term of this Note may be amended or waived with the written consent of Payor and the Holder. INTERMUNE PHARMACEUTICALS, INC. By: --------------------------------- Print Name: --------------------------------- Title: --------------------------------- EX-10.8 9 INTERMUNE PREFERRED STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.8 INTERMUNE PHARMACEUTICALS, INC. SERIES A-1 AND A-2 PREFERRED STOCK PURCHASE AGREEMENT 2 INTERMUNE PHARMACEUTICALS, INC. SERIES A-1 AND A-2 PREFERRED STOCK PURCHASE AGREEMENT THIS SERIES A-1 AND A-2 PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is entered into as of April 27, 1999, by and among INTERMUNE PHARMACEUTICALS, INC. a California corporation (the "Company"), and each of those persons and entities, severally and not jointly, whose names are set forth on the Schedule of Purchasers attached hereto as Exhibit A (which persons and entities are hereinafter collectively referred to as "Purchasers" and each individually as a "Purchaser"). RECITALS WHEREAS, the Company has authorized the sale and issuance of Preferred Stock (the "Shares") in the amount of one million eight hundred thirty-five thousand (1,835,000) Shares of Series A-1 Preferred Stock ("Series A-1 Preferred") and five million six hundred thousand (5,600,000) Shares of Series A-2 Preferred Stock ("Series A-2 Preferred"); WHEREAS, Purchasers desire to purchase the Shares on the terms and conditions set forth herein; and WHEREAS, the Company desires to issue and sell the Shares to Purchasers on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises hereinafter set forth, the parties hereto agree as follows: 1. AGREEMENT TO SELL AND PURCHASE. 1.1 AUTHORIZATION OF SHARES. On or prior to the Closing (as defined in Section 2 below), the Company shall have authorized (i) the sale and issuance to Purchasers of the Shares and (ii) the issuance of such shares of Common Stock to be issued upon conversion of the Shares (the "Conversion Shares"). The Shares and the Conversion Shares shall have the rights, preferences, privileges and restrictions set forth in the Amended and Restated Articles of Incorporation of the Company, as amended, in the form attached hereto as Exhibit B (the "Restated Articles"). 1.2 SALE OF SERIES A PREFERRED STOCK. Subject to the terms and conditions hereof, at the Closing (as defined below) the Company hereby agrees to issue and sell to Purchaser, and Purchaser agrees to purchase from the Company, the number of Shares set forth opposite Purchaser's name on Exhibit A. Consideration for the purchase of Series A-1 shares is more particularly described in Exhibit A. The Purchasers of Series A-2 shares shall pay a purchase price of One Dollar Twenty-Five Cents ($1.25) per share. Subject to the terms and conditions hereof, at a Subsequent Closing (as defined below) the Company will sell an additional eight hundred thousand (800,000) shares of Series A-2 Preferred Stock to third party Purchasers at a price of One Dollar Twenty-Five Cents ($1.25) per share. The Series A-1 3 Preferred and Series A-2 Preferred may be referred to herein collectively as the "Series A Preferred." 2. CLOSING, DELIVERY AND PAYMENT. 2.1 CLOSING. The first closing of the sale and purchase of the Shares under this Agreement (the "Closing") shall take place at 5:00 p.m. on the date hereof, at the offices of at the offices of Cooley Godward LLP, Five Palo Alto Square, 3000 El Camino Real, Palo Alto, California 94306 or at such other time or place as the Company and Purchaser may mutually agree (such date is hereinafter referred to as the "Closing Date"). The subsequent closing shall occur within one hundred twenty (120) days following the Closing Date ("Subsequent Closing"). The purchase and sale of additional Shares of Series A-2 Preferred at any Subsequent Closing shall be pursuant to an agreement identical to this one, except for date and exhibits, and any such purchase and sale of Series A-2 Preferred for the purposes of this Agreement shall be deemed to be a purchase and sale at the Closing, as of the Closing Date. 2.2 DELIVERY. At the Closing and the Subsequent Closing, subject to the terms and conditions hereof, the Company will deliver to the Purchaser certificates representing the number of Shares to be purchased at the Closing and Subsequent Closing by Purchaser, against payment of the purchase price therefor by check, wire transfer made payable to the order of the Company, such consideration as the Board of Directors shall determine, or any combination of the foregoing. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as set forth in the Schedule of Exceptions attached hereto as Exhibit G, the Company hereby represents and warrants to each Purchaser as follows: 3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California. The Company has all requisite corporate power and authority to own and operate its properties and assets, to execute and deliver this Agreement and the First Refusal and Co-Sale Agreement in the form attached hereto as Exhibit C (the "Co-Sale Agreement") and the Investor Rights Agreement in the form attached hereto as Exhibit D (the "Investor Rights Agreement" and together with the Co-Sale Agreement and this Agreement, the "Financing Agreements"), to issue and sell the Shares and the Conversion Shares and to carry out the provisions of the Financing Agreements and the Restated Articles and to carry on its business as presently conducted and as presently proposed to be conducted. The Company is duly qualified and is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so would not have a Material Adverse Effect (as hereinafter defined) on the Company or its business. The Company owns no equity securities of any other corporation, limited partnership or similar entity. The Company is not a participant in any joint venture, partnership or similar arrangement. "Material Adverse Effect" means any adverse effect on the assets, liabilities, business, operations, properties or financial condition of the Company taken as a whole. 2 4 3.2 CAPITALIZATION; VOTING RIGHTS. The authorized capital stock of the Company, immediately prior to the Closing, will consist of fifteen million (15,000,000) shares of Common Stock, none of which is issued and outstanding, and eleven million two hundred thousand (11,200,000) shares of Series A Preferred Stock, eleven million two hundred thousand (11,200,0000) of which are issued and outstanding, one million eight hundred thirty-five thousand (1,835,000) shares of Series A-1 Preferred Stock, none of which is issued and outstanding, five million six hundred thousand (5,600,000) shares of Series A-2 Preferred Stock, none of which is issued and outstanding, five million six hundred thousand (5,600,000) shares of Series A-3 Preferred Stock, none of which is issued and outstanding and one million eight hundred thirty-five thousand (1,835,000) shares of Series A-4 Preferred Stock, none of which is issued and outstanding. The rights, preferences, privileges and restrictions of the Shares are as stated in the Restated Articles. Other than as set forth in the Schedule of Exceptions, and except as may be granted pursuant to the Financing Agreements, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), proxy or shareholder agreements, commitments or agreements of any kind for the purchase or acquisition from the Company of any of its securities. (a) All issued and outstanding shares of the Company's Common Stock (i) have been duly authorized and validly issued, (ii) are fully paid and nonassessable, and (iii) were issued in compliance with all applicable state and Federal laws concerning the issuance of securities. The rights, preferences, privileges and restrictions of the Shares are as stated in the Restated Articles. Each series of Preferred Stock is convertible into Conversion Shares on a one-for-one basis, subject to adjustment as provided in the Restated Articles. The Conversion Shares have been duly and validly reserved for issuance. Except as hereinabove described, the Company has no shares of capital stock reserved for issuance. (b) When issued in compliance with the provisions of this Agreement and the Restated Articles, the Shares and the Conversion Shares will be validly issued, fully paid and nonassessable and will have been issued in compliance with all applicable state and Federal laws concerning the issuance of securities, and will be free of any liens or encumbrances; provided, however, that the Shares and the Conversion Shares may be subject to restrictions on transfer under state and/or Federal securities laws as set forth herein or in the Financing Agreements or as otherwise required by such laws at the time a transfer is proposed. (c) The Company does not have outstanding any bonds, debentures, notes or other obligations the holders of which have the right to vote (or are convertible into or exercisable for securities having the right to vote) with the stockholders of the Company on any matter. 3.3 AUTHORIZATION; BINDING OBLIGATIONS. The Company has all requisite corporate power and authority to execute, deliver and perform its obligations under the Financing Agreements. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization of the Financing Agreements, the performance of all obligations of the Company hereunder and thereunder at the Closing and the authorization, sale, issuance and delivery of the Shares pursuant hereto and the Conversion Shares pursuant to the Restated Articles has been taken or will be taken prior to the Closing. The Financing Agreements, when executed and delivered, will be valid and binding obligations of the Company 3 5 enforceable against the Company in accordance with their terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights; (ii) general principles of equity that restrict the availability of equitable remedies; and (iii) to the extent that the enforceability of the indemnification provisions in Section 2.9 of the Investor Rights Agreement may be limited by applicable laws. The sale of the Shares and the subsequent conversion of the Shares into Conversion Shares are not and will not be subject to any rights of conversion, preemptive rights or rights of first refusal that have not been properly waived or complied with. 3.4 FINANCIAL STATEMENTS. The Company has delivered to each Purchaser (i) its unaudited balance sheet as at December 31, 1998 and unaudited statement of income and cash flows for the twelve months ending December 31, 1998, and (ii) its unaudited balance sheet as at February 28, 1999 (the "Statement Date") and unaudited consolidated statement of income and cash flows for the two month period ending on the Statement Date (collectively, the "Financial Statements"). The Financial Statements, together with the notes thereto, are complete and correct in all material respects, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated, except as disclosed therein, and present fairly the financial condition and position of the Company as of February 28, 1999 and the Statement Date; provided, however, that the unaudited financial statements are subject to normal recurring year-end audit adjustments (which are not expected to be material), and do not contain all footnotes required under generally accepted accounting principles. 3.5 LIABILITIES. The Company has no material liabilities and, to the best of its knowledge after making due inquiry, knows of no material contingent liabilities not disclosed in the Financial Statements, except current liabilities incurred in the ordinary course of business subsequent to the Statement Date which will not have, either in any individual case or in the aggregate, a Material Adverse Effect. 3.6 AGREEMENTS; ACTION. (a) Other than as set forth on the Schedule of Exceptions and except for the Financing Agreements and agreements between the Company and its employees with respect to the sale of the Company's Common Stock, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates or any affiliate thereof. For purposes of this Agreement, Connetics Corporation ("Connetics") shall not be considered an affiliate of the Company. (b) Other than as set forth on the Schedule of Exceptions, there are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or, to the best of its knowledge after making due inquiry, by which it is bound which may involve (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of Twenty-Five Thousand Dollars ($25,000), or (ii) the license of any patent, copyright, trade secret or other proprietary right to or from the Company (other than licenses arising from the purchase of "off the shelf" or other standard products), or (iii) provisions restricting or affecting the development, manufacture or distribution of the Company's products or services, or (iv) indemnification by the Company with respect to 4 6 infringements of proprietary rights (other than indemnification obligations arising from purchase or sale agreements entered into in the ordinary course of business). (c) The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or any other liabilities individually in excess of Twenty-Five Thousand Dollars ($25,000) or, in the case of indebtedness and/or liabilities individually less than Twenty-Five Thousand Dollars ($25,000), in excess of Fifty Thousand Dollars ($50,000) in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights. (d) For the purposes of subsections (b) and (c) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. 3.7 OBLIGATIONS TO RELATED PARTIES. There are no obligations of the Company to officers, directors, shareholders, affiliates or employees of the Company other than (a) for payment of salary for services rendered, (b) reimbursement for reasonable expenses incurred on behalf of the Company and, (c) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by the Board of Directors of the Company). None of the officers, directors or shareholders of the Company, or any members of their immediate families, are indebted to the Company or have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation which competes with the Company, except that officers, directors and/or shareholders of the Company may own stock in publicly traded companies which may compete with the Company and except as contemplated by this Agreement and the Common Stock Purchase Agreements between the Company and certain of the Purchasers. No officer, director or shareholder of the Company, or any member of their immediate families, has an interest, directly or indirectly, in any material contract with the Company (other than such contracts as relate to any such person's ownership of capital stock or other securities of the Company). Except as may be disclosed in the Financial Statements, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 3.8 CHANGES. Since the Statement Date, the Company has conducted its business only in, and has not engaged in any material transaction other than according to, the ordinary and usual course of its business and as contemplated by this Agreement and the Common Stock Purchase Agreements and there has not been to the Company's knowledge: (a) Any change in the assets, liabilities, financial condition or operations of the Company from that reflected in the Financial Statements, other than changes in the ordinary course of business, none of which individually or in the aggregate has had or is expected to have a Material Adverse Effect; 5 7 (b) Any resignation or termination of any key officers of the Company; and the Company, to the best of its knowledge after making due inquiry, does not know of the impending resignation or termination of employment of any such officer; (c) Any material change, except in the ordinary course of business, in the contingent obligations of the Company by way of guaranty, endorsement, indemnity, warranty or otherwise; (d) Any damage, destruction or loss, whether or not covered by insurance which has a Material Adverse Effect; (e) Any waiver by the Company of a valuable right or of a material debt owed to it; (f) Any direct or indirect loans made by the Company to any shareholder, employee, officer, affiliate or director of the Company, other than advances made in the ordinary course of business; (g) Any material change in any compensation arrangement or agreement with any employee, officer, director or shareholder of the Company; (h) Any declaration or payment of any dividend or other distribution of the assets of the Company; (i) Any labor organization activity; (j) Any debt, obligation or liability incurred, assumed or guaranteed by the Company, except those for immaterial amounts and for current liabilities incurred in the ordinary course of business; (k) Any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets; (l) Any change in any material agreement to which the Company is a party or by which it is bound which has a Material Adverse Effect, including compensation agreements with the Company's employees; or (m) Any other event or condition of any character that, either individually or cumulatively, has a Material Adverse Effect. 3.9 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. The Company has good and marketable title to its properties and assets, including the properties and assets reflected in the most recent balance sheet included in the Financial Statements, and good title to its leasehold estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (i) those resulting from taxes which have not yet become delinquent, (ii) minor liens and encumbrances which do not materially detract from the value of the property subject thereto or materially impair the operations of the Company, and (iii) liens and encumbrances that have otherwise arisen in the ordinary course of business. All facilities, machinery, equipment, 6 8 fixtures, vehicles and other properties owned, leased or used by the Company are in good operating condition and repair and are reasonably fit and usable for the purposes for which they are being used. The Company is in compliance with all material terms of each lease to which it is a party or is otherwise bound. 3.10 PATENTS AND TRADEMARKS. The Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, information and other proprietary rights and processes necessary for its business as now conducted and as proposed to be conducted, without any known infringement of the rights of others. The Company is not aware of any reasonable basis for the denial of any pending patent application (including divisions, continuations, continuations in part and renewal applications) relating to any patents filed by the Company and does not believe that anything contained in such patent applications is reasonably likely to effect adversely any extension, modification or renewal of existing patents or patent applications relating to the Company's intellectual property. There are no outstanding options, licenses or agreements of any kind relating to the foregoing, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes of any other person or entity other than such licenses or agreements arising from the purchase of "off the shelf" or standard products. The Company has not received any communications alleging that the Company has violated or, by conducting its business as proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with their duties to the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of the Financing Agreements, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will, to the Company's knowledge, conflict with or result in a material breach of the terms, conditions or provisions of, or constitute a material default under, any contract, covenant or instrument under which any employee is now obligated. The Company does not believe it is or will be necessary to utilize any inventions, trade secrets or proprietary information of any of its employees made prior to their employment by the Company, except for inventions, trade secrets or proprietary information that have been assigned to the Company. 3.11 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in violation or default of any term of its Restated Articles or Bylaws, or of any provision of any mortgage, indenture, contract, agreement, instrument or contract to which it is party or by which it is bound or of any judgment, decree, order, writ or, to its knowledge after making due inquiry, any statute, rule or regulation applicable to the Company which would have a Material Adverse Effect. The execution, delivery, and performance of and compliance with the Financing Agreements, and the issuance and sale of the Shares pursuant hereto and of the Conversion Shares pursuant to the Restated Articles, will not, with or without the passage of time or giving of notice, result in any such material violation, or be in material conflict with or constitute a material default under any such term, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or the suspension, revocation, impairment, 7 9 forfeiture or nonrenewal of any permit license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties. 3.12 LITIGATION. There is no action, suit, proceeding or investigation pending or to the Company's knowledge currently threatened against the Company that questions the validity of the Financing Agreements or the right of the Company to enter into any of such agreements, or to consummate the transactions contemplated hereby or thereby, or which might result, either individually or in the aggregate, in any material adverse change in the assets, condition, affairs or prospects of the Company, financially or otherwise, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for the foregoing. The foregoing includes, without limitation, actions pending or threatened (or any basis therefor known to the Company) involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or which the Company intends to initiate. 3.13 TAX RETURNS AND PAYMENTS. The Company has timely filed all tax returns (Federal, state and local) required to be filed by it. All taxes shown to be due and payable on such returns, any assessments imposed, and, to the Company's knowledge, all other taxes due and payable by the Company on or before the Closing have been paid or will be paid prior to the time they become delinquent. The Company has no knowledge of any liability of any tax to be imposed upon its properties or assets as of the date of this Agreement that is not adequately provided for. As of the date hereof, there are not pending or, to the knowledge of the Company, threatened in writing, any audits, examinations, investigations or other proceedings against the Company in respect to taxes or tax matters. There are not any unresolved questions or claims concerning the Company's tax liability that may have a Material Adverse Effect. The provision for taxes of the Company as shown in the Balance Sheet as at December 31, 1998 is adequate for taxes due or accrued as of the date thereof. The Company has not elected pursuant to the Internal Revenue Code of 1986, as amended (the "Code") to be treated as a Subchapter S corporation or a collapsible corporation pursuant to Section 341(f) and Section 1362(a) of the Code, nor has it made any other elections pursuant to the Code (other than elections which relate solely to methods of accounting, depreciation or amortization) which would have a Material Adverse Effect. 3.14 EMPLOYEES. The Company has no collective bargaining agreements with any of its employees. There is no labor union organizing activity pending or, to the Company's knowledge, threatened with respect to the Company. The Company is not a party to or bound by any currently effective employment contract, deferred compensation or severance arrangement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation plan or agreement. To the Company's knowledge, no employee of the Company, nor any consultant with whom the Company has contracted, is in violation of any term of any employment contract, proprietary information agreement or any other agreement relating to the right of any such individual to be employed by, or to contract with, the Company because of the nature of the business to be conducted by the Company; and to the Company's knowledge the 8 10 continued employment by the Company of its present employees, and the performance of the Company's contracts with its independent contractors, will not result in any such violation. The Company has not received any notice alleging that any such violation has occurred. No employee of the Company has been granted the right to continued employment by the Company or to any material compensation following termination of employment with the Company. The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company, nor does the Company have a present intention to terminate the employment of any officer, key employee or group of key employees. 3.15 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS. Each former and current employee, officer and consultant of the Company has executed a Proprietary Information and Inventions Agreement. No current employee, officer or consultant of the Company has excluded works or inventions made prior to his or her employment with the Company from his or her assignment of inventions pursuant to such employee, officer or consultant's Proprietary Information and Inventions Agreement. 3.16 OBLIGATIONS OF MANAGEMENT. Each officer of the Company is currently devoting one hundred percent (100%) of his business time to the conduct of the business of the Company. The Company is not aware of any officer or key employee of the Company planning to work less than full time at the Company in the future. 3.17 REGISTRATION RIGHTS. Except as required pursuant to the Financing Agreements, the Company is presently not under any obligation, and has not granted any rights, to register (as defined in Section 1.1 of the Investor Rights Agreement) any of the Company's presently outstanding securities or any of its securities that may hereafter be issued. 3.18 COMPLIANCE WITH LAWS; PERMITS. To its knowledge, after making due inquiry, the Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties which violation would have a Material Adverse Effect. No governmental orders, permissions, consents, approvals or authorizations are required to be obtained and no registrations or declarations are required to be filed in connection with the execution and delivery of the Financing Agreements and the issuance of the Shares or the Conversion Shares, except such as has been duly and validly obtained or filed, or with respect to any filings that must be made after the Closing, as will be filed in a timely manner. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, except for those the lack of which would have a Material Adverse Effect. The Company believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. 3.19 ENVIRONMENTAL AND SAFETY LAWS. To its knowledge, after making due inquiry, the Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and to its knowledge, after making due inquiry, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 9 11 3.20 OFFERING VALID. Assuming the accuracy of the representations and warranties of the Purchasers contained in Section 4.2 hereof, the offer, sale and issuance of the Shares and the Conversion Shares will be exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act") and will have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws. Neither the Company nor any agent on its behalf has solicited or will solicit any offers to sell or has offered to sell or will offer to sell all or any part of the Shares to any person or persons so as to bring the sale of such Shares by the Company within the registration provisions of the Securities Act or any state securities laws. 3.21 FULL DISCLOSURE. The Financing Agreements, the Exhibits thereto and all other agreements delivered by the Company to Purchasers or their attorneys or agents in connection herewith or therewith or with the transactions contemplated hereby or thereby, do not contain any untrue statement of a material fact nor, to the Company's knowledge, omit to state a material fact necessary in order to make the statements contained herein or therein not misleading. Notwithstanding the foregoing, the business plan most recently provided by the Company to the Purchasers (the "Business Plan") was prepared by the management of the Company in a good faith effort to describe the Company's proposed business and products and the markets therefor. The assumptions applied in preparing the Business Plan appeared reasonable to management as of the date thereof; however, there is no assurance that these assumptions will prove to be valid or that the objectives set forth in the Business Plan will be achieved. To the Company's knowledge, there are no facts which (individually or in the aggregate) would or could reasonably be expected to have a Material Adverse Effect that have not been set forth in the Agreement, the Exhibits hereto, the Financing Agreements, the Financial Statements or in other documents delivered to Purchasers or their attorneys or agents in connection herewith. 3.22 CORPORATE DOCUMENTS. The Restated Articles and Bylaws of the Company are in the form provided to counsel for the Purchaser. The copy of the minute books of the Company provided to counsel for the Purchasers contains minutes of all meetings of directors and shareholders and all actions by written consent without a meeting by the directors and shareholders since the date of incorporation and reflects accurately in all material respects all actions by the directors and shareholders with respect to all transactions referred to in such minutes. 3.23 SECTION 83(b) ELECTIONS. To the Company's knowledge, all elections and notices permitted by Section 83(b) of the Code and any analogous provisions of applicable state tax laws will be or have been timely filed by all employees who have purchased shares of the Company's Common Stock under agreements that provide for the vesting of such shares. 3.24 REAL PROPERTY HOLDING CORPORATION. The Company is not a real property holding corporation within the meaning of Section 897(c)(2) of the Code and any regulations promulgated thereunder. 3.25 INSURANCE. Fire and casualty, clinical trials, general liability, business interruption, product liability, and sprinkler and water damage insurance policies are in full force 10 12 and effect and are with reputable insurance carriers, provide adequate coverage for all normal risks incident to the business of the Company and its properties and assets, and are in character and amount at least equivalent to that carried by companies engaged in similar businesses and subject to the same or similar perils or hazards. 3.26 INVESTMENT COMPANY ACT. The Company is not an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 3.27 YEAR 2000. The Company has reviewed its operations to evaluate the extent to which the business or operations of the Company will be affected by the Year 2000 Problem, as defined below. The Year 2000 Problem is not reasonably likely to have a Material Adverse Effect. The "Year 2000 Problem" as used herein, means any significant risk that the computer hardware or software used in the receipt, transmission, processing, manipulation, storage, retrieval, retransmission or other utilization of data or in the operation of mechanical or electrical systems of any kind will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively as in the case of dates or time periods occurring prior to January 1, 2000. 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser hereby represents and warrants, severally but not jointly, to the Company as follows (such representations and warranties do not lessen or obviate the representations and warranties of the Company set forth in this Agreement): 4.1 REQUISITE POWER AND AUTHORITY. Purchaser has all necessary power and authority under all applicable provisions of law to execute and deliver the Financing Agreements and to carry out their provisions. All action on Purchaser's part required for the lawful execution and delivery of the Financing Agreements have been or will be effectively taken prior to the Closing. Upon their execution and delivery, the Financing Agreements will be valid and binding obligations of Purchaser, enforceable in accordance with their terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, (ii) general principles of equity that restrict the availability of equitable remedies, and (iii) to the extent that the enforceability of the indemnification provisions of Section 2.9 of the Investor Rights Agreement may be limited by applicable laws. 4.2 INVESTMENT REPRESENTATIONS. Purchaser understands that neither the Shares nor the Conversion Shares have been registered under the Securities Act. Purchaser also understands that the Shares are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon Purchaser's representations contained in the Agreement. Purchaser hereby represents and warrants as follows: (a) PURCHASER BEARS ECONOMIC RISK. Purchaser understands the business in which the Company is engaged and has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests. Purchaser must bear the economic risk 11 13 of this investment indefinitely unless the Shares (or the Conversion Shares) are registered pursuant to the Securities Act, or an exemption from registration is available. Purchaser understands that the Company has no present intention of registering the Shares, the Conversion Shares or any shares of its Common Stock. Purchaser also understands that there is no assurance that any exemption from registration under the Securities Act will be available and that, even if available, such exemption may not allow Purchaser to transfer all or any portion of the Shares or the Conversion Shares under the circumstances, in the amounts or at the times Purchaser might propose. (b) ACQUISITION FOR OWN ACCOUNT. Purchaser is acquiring the Shares and the Conversion Shares for Purchaser's own account for investment only, and not with a view towards their distribution. (c) PURCHASER CAN PROTECT ITS INTEREST. Purchaser represents that by reason of its, or of its management's, business or financial experience, Purchaser has the capacity to protect its own interests in connection with the transactions contemplated in the Financing Agreements. Further, Purchaser is aware of no publication of any advertisement in connection with the transactions contemplated in the Agreement. (d) ACCREDITED INVESTOR. Purchaser represents that it is an accredited investor within the meaning of Regulation D under the Securities Act. (e) COMPANY INFORMATION. Purchaser has received and read the Financial Statements and Business Plan and has had an opportunity to discuss the Company's business, management and financial affairs with directors, officers and management of the Company and has had the opportunity to review the Company's operations and facilities. Purchaser has also had the opportunity to ask questions of and receive answers from, the Company and its management regarding the terms and conditions of this investment. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 3 of this Agreement or the right of Purchaser to rely thereon. (f) RULE 144. Purchaser acknowledges and agrees that the Shares, and, if issued, the Conversion Shares must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Purchaser has been advised or is aware of the provisions of Rule 144 promulgated under the Securities Act, which permits limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things: the availability of certain current public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being through an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934, as amended) and the number of shares being sold during any three-month period not exceeding specified limitations. (f) RESIDENCE. The office of the Purchaser in which its investment decision was made is located at the address of the Purchaser set forth on Exhibit A. 12 14 4.3 TRANSFER RESTRICTIONS. Each Purchaser acknowledges and agrees that the Shares and, if issued, the Conversion Shares are subject to restrictions on transfer as set forth in the Financing Agreements. 5. CONDITIONS TO CLOSING. 5.1 CONDITIONS TO PURCHASERS' OBLIGATIONS AT THE CLOSING. Purchasers' obligations to purchase the Shares to be purchased at the Closing are subject to the satisfaction, at or prior to the Closing, of the following conditions: (a) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF Obligations. The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects as of the Closing Date with the same force and effect as if they had been made as of the Closing Date, and the Company shall have performed all obligations and conditions herein required to be performed or observed by it on or prior to the Closing. (b) LEGAL INVESTMENT. On the Closing Date, the sale and issuance of the Shares and the proposed issuance of the Conversion Shares shall be legally permitted by all laws and regulations to which Purchasers and the Company are subject. (c) CONSENTS, PERMITS, AND WAIVERS. The Company shall have obtained any and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by the Financing Agreements (except for such as may be properly obtained subsequent to the Closing). (d) FILING OF RESTATED ARTICLES. The Restated Articles shall have been filed with the Secretary of State of the State of California. (e) CORPORATE DOCUMENTS. The Company shall have delivered to Purchasers or their counsel, copies of all corporate documents of the Company as Purchasers shall reasonably request. (f) RESERVATION OF CONVERSION SHARES. The Conversion Shares issuable upon conversion of the Shares shall have been duly authorized and reserved for issuance upon such conversion. (g) COMPLIANCE CERTIFICATE. The Company shall have delivered to Purchasers a Compliance Certificate, executed by the President of the Company, dated the date of the Closing, to the effect that the conditions specified in subsections (a), (c), (d) and (f) of this Section 5.1 have been satisfied. (h) INVESTOR RIGHTS AGREEMENT. An Investor Rights Agreement substantially in the form attached hereto as Exhibit D shall have been executed and delivered by the parties thereto. (i) CO-SALE AGREEMENT. The Co-Sale Agreement substantially in the form attached hereto as Exhibit C shall have been executed and delivered by the parties thereto. 13 15 The stock certificates representing the shares subject to the Co-Sale Agreement shall have been delivered to the Secretary of the Company and shall have had appropriate legends placed upon them to reflect the restrictions on transfer set forth on the Co-Sale Agreement. (j) BOARD OF DIRECTORS. As shall be more specifically set forth in the Voting Agreement, the authorized size of the Board of Directors of the Company shall be five. The Board of Directors shall initially consist of W. Scott Harkonen, James I. Healy, John Higgins and Edgar Engleman. (k) LEGAL OPINION. The Purchasers shall have received from legal counsel to the Company an opinion addressed to them, dated as of the Closing Date, in substantially the form attached hereto as Exhibit E. (l) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the Closing hereby and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to the Purchasers and their special counsel, and the Purchasers and their special counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request. (m) VOTING AGREEMENT. The Voting Agreement substantially in the form attached hereto as Exhibit F shall have been executed and delivered by the parties thereto. (n) CONVERSION OF SERIES A PREFERRED. Connetics shall have delivered a notice of conversion of the Series A Preferred Stock to be effective upon the delivery of its Series A Preferred Stock certificate, which certificate shall be delivered promptly following the payment of the dividend by the Company to Connetics contemplated by Article IV.A.1 of the Restated Articles. 5.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The Company's obligation to issue and sell the Shares to be purchased at the Closing is subject to the satisfaction, on or prior to the Closing, of the following conditions: (a) REPRESENTATIONS AND WARRANTIES TRUE. The representations and warranties made by those Purchasers acquiring Shares in Section 4 hereof shall be true and correct in all material respects at the date of the Closing, with the same force and effect as if they had been made on and as of said date. (b) PERFORMANCE OF OBLIGATIONS. Such Purchasers shall have performed and complied with all agreements and conditions herein required to be performed or complied with by such Purchasers on or before the Closing. (c) FILING OF RESTATED ARTICLES. The Restated Articles shall have been filed with the Secretary of State of the State of California. (d) INVESTOR RIGHTS AGREEMENT. An Investor Rights Agreement substantially in the form attached hereto as Exhibit D shall have been executed and delivered by the Purchasers. 14 16 (e) CO-SALE AGREEMENT. The Co-Sale Agreement substantially in the form attached hereto as Exhibit C shall have been executed and delivered by the parties thereto. (f) CONSENTS, PERMITS, AND WAIVERS. The Company shall have obtained any and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by the Financing Agreements (except for such as may be properly obtained subsequent to the Closing). (g) VOTING AGREEMENT. The Voting Agreement substantially in the form attached hereto as Exhibit F shall have been executed and delivered by the parties thereto. 6. MISCELLANEOUS. 6.1 GOVERNING LAW. This Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and performed entirely in California. 6.2 SURVIVAL. The representations, warranties, covenants and agreements made herein shall survive any investigation made by any Purchaser and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument. 6.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of the Shares from time to time. 6.4 ENTIRE AGREEMENT. The Financing Agreements, the Exhibits and Schedules thereto and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 6.5 SEVERABILITY. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 6.6 AMENDMENT AND WAIVER. (a) This Agreement may be amended or modified only upon the written consent of at least fifty-five percent (55%) of then-outstanding shares of Series A-1 Preferred and Series A-2 Preferred of the Company, respectively voting separately by each series. (b) The obligations of the Company and the rights of the holders of the Shares and the Conversion Shares under the Agreement may be waived only with the written 15 17 consent of at least fifty-five percent (55%) of then-outstanding shares of Series A-1 Preferred and Series A-2 Preferred of the Company, respectively voting separately by each series. 6.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission to exercise any right, power or remedy accruing to any party, upon any breach, default or noncompliance by another party under the Financing Agreements or the Restated Articles, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of or in any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on any Purchaser's part of any breach, default or noncompliance under the Financing Agreements or under the Restated Articles or any waiver on such party's part of any provisions or conditions of the Financing Agreements, or the Restated Articles must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under the Financing Agreements, the Restated Articles, by law, or otherwise afforded to any party, shall be cumulative and not alternative. 6.8 NOTICES. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified; (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (iv) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Company at the address as set forth on the signature page hereof and to Purchaser at the address set forth on Exhibit A attached hereto or at such other address as the Company or Purchaser may designate by ten (10) days advance written notice to the other parties hereto. 6.9 EXPENSES. The Company shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of the Financing Agreements. The Company shall, at the Closing, reimburse the reasonable fees and expenses of separate counsel for the Purchasers of up to Twenty-Five Thousand Dollars ($25,000), and shall reimburse such special counsel for reasonable expenses incurred in connection with the negotiation, execution, delivery and performance of the Financing Agreements of up to Ten Thousand Dollars ($10,000). 6.10 ATTORNEYS' FEES. In the event that any dispute among the parties to the Financing Agreements should result in litigation, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to the Financing Agreements, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 6.11 TITLES AND SUBTITLES. The titles of the sections and subsections of the Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 16 18 6.12 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 6.13 BROKER'S FEES. Each party hereto represents and warrants, severally but not jointly, that no agent, broker, investment banker, person or firm acting on behalf of or under the authority of such party hereto is or will be entitled to any broker's or finder's fee or any other commission directly or indirectly in connection with the transactions contemplated herein. Each party hereto further agrees to indemnify each other party for any claims, losses or expenses incurred by such other party as a result of the representation in this Section 6.13 being untrue. 6.14 EXCULPATION AMONG PURCHASERS. Each Purchaser acknowledges that it is not relying upon any person, firm, or corporation, other than the Company and its officers and directors, in making its investment or decision to invest in the Company. Each Purchaser agrees that no Purchaser nor the respective controlling persons, officers, directors, partners, members, agents, or employees of any Purchaser shall be liable for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the Shares and Conversion Shares. 6.15 PRONOUNS. All pronouns contained herein, and any variations thereof, shall be deemed to refer to the masculine, feminine or neutral, singular or plural, as to the identity of the parties hereto may require. 6.16 WAIVER OF CONFLICTS. Each party to this Agreement acknowledges that legal counsel for the Company, Cooley Godward LLP ("Cooley Godward") has in the past and may continue in the future to perform legal services for one or more of the Purchasers or their affiliates in matters unrelated to the transactions contemplated by this Agreement, including, but not limited to, the representation of the Purchasers in matters of a similar nature to the transactions contemplated herein. Each party to this Agreement hereby (a) acknowledges that they have had an opportunity to ask for and have obtained information relevant to such representation, including disclosure of the reasonably foreseeable adverse consequences of such representation; (b) acknowledges that with respect to the transactions contemplated herein, Cooley Godward has represented the Company and not any individual Purchaser or any individual shareholder, director or employee of the Company; and (c) gives its informed consent to Cooley Godward's representation of the Company in the transactions contemplated by this Agreement and Cooley Godward's representation of one or more of the Purchasers or their affiliates in matters unrelated to such transactions. 6.17 CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION OR IN THE ABSENCE OF AN EXEMPTION FROM SUCH QUALIFICATION IS UNLAWFUL. PRIOR TO ACCEPTANCE OF SUCH CONSIDERATION BY THE COMPANY, THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION FROM SUCH QUALIFICATION BEING AVAILABLE. 17 19 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 18 20 PURCHASE AGREEMENT 21 IN WITNESS WHEREOF, the parties hereto have executed the SERIES A-1 AND A-2 PREFERRED STOCK PURCHASE AGREEMENT as of the date set forth in the first paragraph hereof. COMPANY INTERMUNE PHARMACEUTICALS, INC. /s/ W. Scott Harkonen - ------------------------------------ W. Scott Harkonen President PURCHASERS CONNETICS CORPORATION /s/ T. Wiggans - ------------------------------------ Thomas Wiggans Chief Executive Officer GENENTECH, INC. By: ------------------------ Print Name: ------------------------ Title: ------------------------ SANDERLING VENTURE PARTNERS IV, L.P. - ------------------------------------ ------------------------------------ Fred A. Middleton Robert G. McNeil General Partner General Partner SANDERLING IV LIMITED, L.P. - ------------------------------------ ------------------------------------ Fred A. Middleton Robert G. McNeil General Partner General Partner PURCHASE AGREEMENT 22 SANDERLING IV BIOMEDICAL, L.P. - ------------------------------------ ------------------------------------ Fred A. Middleton Robert G. McNeil General Partner General Partner SANDERLING [FERI TRUST] VENTURE PARTNERS IV, L.P. - ------------------------------------ ------------------------------------ Fred A. Middleton Robert G. McNeil General Partner General Partner SANDERLING IV VENTURE MANAGEMENT - ------------------------------------ ------------------------------------ Fred A. Middleton Robert G. McNeil General Partner General Partner BIOTECHNOLOGY DEVELOPMENT FUND, L.P. BIOTECHNOLOGY DEVELOPMENT FUND III, L.P. By: BioAsia Investments, LLC, By: BioAsia Investments, LLC, its General Partner its General Partner By: By: --------------------------------- --------------------------------- Frank Kung, Managing Member Frank Kung, Managing Member CHARTER VENTURES III, LLC By: --------------------------------- Print Name: ------------------------- Managing Member PURCHASE AGREEMENT 23 VERON INTERNATIONAL, LTD. By: ------------------------------ Name: ------------------------------ Title: ------------------------------ PURCHASE AGREEMENT 24 Index of Exhibits Schedule of Purchasers Exhibit A Restated Articles Exhibit B Co-Sale Agreement Exhibit C Investor Rights Agreement Exhibit D Form of Legal Opinion Exhibit E Voting Agreement Exhibit F Schedule of Exceptions Exhibit G
25 EXHIBIT A SERIES A-1 PURCHASERS
NUMBER OF NON-CASH PURCHASER SHARES CONSIDERATION - ----------------------- ----------- ------------- Genentech, Inc.(1) 875,000 (2) Connetics Corporation(3) 960,000 (4) TOTAL 1,835,000
- ---------- (1) Genentech, Inc. 1 DNA Way South San Francisco, California 94080 Attention: General Counsel (2) Consideration for the shares is the execution on the Closing Date of an Amendment of the License Agreement for Interferon Gamma between Connetics and Genentech, Inc. in a form approved by the Purchasers. (3) Connetics Corporation 3400 West Bayshore Road Palo Alto, CA 94303 Attention: General Counsel (4) Consideration for the shares is (a) the surrender of 11,200,000 shares of outstanding Series A Preferred shares of the Company, (b) execution on the Closing Date of that certain Collaboration Agreement between Connetics and the Company in a form satisfactory to Purchasers, (c) execution on the Closing Date of that certain Transition Agreement between Connetics and the Company, (d) execution prior to the Closing Date of that certain Amended and Restated Service Agreement between Connetics and the Company in a form satisfactory to Purchasers, (e) execution on the Closing Date of an Amendment of the Sublicense Agreement between Connetics Corporation and Company in a form approved by the Purchasers, and (f) execution on the Closing Date of an Amendment of the License Agreement for Interferon Gamma between Connetics and Genentech, Inc. in a form approved by the Purchasers. 26 SERIES A-2 PURCHASERS
NUMBER TOTAL PURCHASER OF SHARES PURCHASE PRICE - --------- --------- -------------- Sanderling Venture Partners IV, L.P.(5) 1,266,989 $1,583,736.25 Sanderling IV Limited Partnership, L.P.(6) 494,287 $ 617,858.75 Sanderling IV Biomedical, L.P.(7) 493,231 $ 616,538.75 Sanderling [Feri Trust] Venture Partners IV, L.P.(8) 140,571 $ 175,713.75 Sanderling IV Venture Management(9) 4,922 $ 6,152.50 Biotechnology Development Fund, L.P.(10) 842,688 $1,053,360.00 Biotechnology Development Fund, L.P.(10) 357,312 $ 446,640.00 Veron International, Ltd.(11) 800,000 $ 1,000,000 Charter Ventures III, LLC(12) 400,000 $ 500,000.00 Other Third Party Investor(s) 800,000 $1,000,000.00 --------- ------------- TOTALS 5,600,000 $7,000,000.00 ========= =============
(5) 2730 Sand Hill Road, Suite 200 Menlo Park, CA 94025 Attention: General Partner (6) Same address as in footnote 5. (7) Same address as in footnote 5. (8) Same address as in footnote 5. (9) Same address as in footnote 5. (10) 575 High Street, Suite 201 Palo Alto, CA 94301 Attention: General Partner (11) ChinaChem Golden Plaza Top Floor 77 Mody Road Tsimshatsui East, Kowloon Hong Kong (12) 525 University Avenue, Suite 1500 Palo Alto, CA 94301 Attention: Managing Member 27 EXHIBIT B RESTATED ARTICLES (attached) 28 EXHIBIT C CO-SALE AGREEMENT (attached) 29 EXHIBIT D INVESTOR RIGHTS AGREEMENT (attached) 30 EXHIBIT E FORM OF LEGAL OPINION (attached) 31 EXHIBIT F VOTING AGREEMENT (attached) 32 EXHIBIT G SCHEDULE OF EXCEPTIONS (attached) 33 TABLE OF CONTENTS
PAGE 1. AGREEMENT TO SELL AND PURCHASE.................................................... 1 1.1 Authorization of Shares.................................................... 1 1.2 Sale of Series A Preferred Stock........................................... 1 2. CLOSING, DELIVERY AND PAYMENT..................................................... 2 2.1 Closing.................................................................... 2 2.2 Delivery................................................................... 2 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................................... 2 3.1 Organization, Good Standing and Qualification.............................. 2 3.2 Capitalization; Voting Rights.............................................. 3 3.3 Authorization; Binding Obligations......................................... 3 3.4 Financial Statements....................................................... 4 3.5 Liabilities................................................................ 4 3.6 Agreements; Action......................................................... 4 3.7 Obligations to Related Parties............................................. 5 3.8 Changes.................................................................... 5 3.9 Title to Properties and Assets; Liens, etc................................. 6 3.10 Patents and Trademarks..................................................... 7 3.11 Compliance with Other Instruments.......................................... 7 3.12 Litigation................................................................. 8 3.13 Tax Returns and Payments................................................... 8 3.14 Employees.................................................................. 8 3.15 Proprietary Information and Inventions Agreements.......................... 9 3.16 Obligations of Management.................................................. 9 3.17 Registration Rights........................................................ 9 3.18 Compliance with Laws; Permits.............................................. 9 3.19 Environmental and Safety Laws.............................................. 9 3.20 Offering Valid............................................................. 10 3.21 Full Disclosure............................................................ 10 3.22 Corporate Documents........................................................ 10 3.23 Section 83(b) Elections.................................................... 10
i. 34 TABLE OF CONTENTS (CONTINUED)
PAGE 3.24 Real Property Holding Corporation.......................................... 10 3.25 Insurance.................................................................. 10 3.26 Investment Company Act..................................................... 11 3.27 Year 2000.................................................................. 11 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.................................. 11 4.1 Requisite Power and Authority.............................................. 11 4.2 Investment Representations................................................. 11 4.3 Transfer Restrictions...................................................... 13 5. CONDITIONS TO CLOSING............................................................. 13 5.1 Conditions to Purchasers' Obligations at the Closing....................... 13 5.2 Conditions to Obligations of the Company................................... 14 6. MISCELLANEOUS..................................................................... 15 6.1 Governing Law.............................................................. 15 6.2 Survival................................................................... 15 6.3 Successors and Assigns..................................................... 15 6.4 Entire Agreement........................................................... 15 6.5 Severability............................................................... 15 6.6 Amendment and Waiver....................................................... 15 6.7 Delays or Omissions........................................................ 16 6.8 Notices.................................................................... 16 6.9 Expenses................................................................... 16 6.10 Attorneys' Fees............................................................ 16 6.11 Titles and Subtitles....................................................... 17 6.12 Counterparts............................................................... 17 6.13 Broker's Fees.............................................................. 17 6.14 Exculpation Among Purchasers............................................... 17 6.15 Pronouns................................................................... 17 6.16 Waiver of Conflicts........................................................ 17 6.17 California Corporate Securities Law........................................ 17
ii. EX-10.9 10 TRANSITION AGREEMENT 1 EXHIBIT 10.9 TRANSITION AGREEMENT This TRANSITION AGREEMENT ("Agreement"), dated as of April 27, 1999 ("Effective Date"), is entered into by and between Connetics Corporation, a Delaware corporation ("Connetics") and InterMune Pharmaceuticals, Inc., a California corporation ("InterMune"). Connetics and InterMune are also referred to as a "Party" or "Parties" to this Agreement. BACKGROUND A. Connetics is party to a License Agreement with Genentech, Inc. dated May 5, 1998, as amended, ("Genentech License") pursuant to which Genentech licensed to Connetics certain rights to Actimmune (as defined below). B. Connetics has sublicensed to InterMune its rights under the Genentech License and under the Supply Agreement between Connetics and Genentech dated May 5, 1998 ("Genentech Supply Agreement"), all done pursuant to the Exclusive Sublicense Agreement between Connetics and InterMune dated as of August 21, 1998, as amended and restated effective April 27, 1999. C. The Genentech Supply Agreement includes provisions for Connetics to transfer manufacturing of Actimmune to a third party manufacturer [*], and Connetics desires to create an incentive for InterMune (as Connetics' sublicensee) to accelerate the transfer of manufacturing. D. InterMune and Connetics have entered into a Term Sheet as of February 26, 1999 (the "Term Sheet") pursuant to which, among other things, InterMune agreed that Connetics will have the right to book certain net revenues, expenses and net profits related to sales of Actimmune Units for the treatment of CGD (defined below) until December 31, 2001 (the "CGD Revenues"). E. InterMune and Connetics have entered into that certain Collaboration Agreement (the "Collaboration Agreement") and certain other related documents as of even date herewith, which collectively set forth the transaction contemplated by the Term Sheet (the "Transaction"). F. In connection with the Transaction, InterMune and Connetics desire to enter into this Transition Agreement to outline the mechanism by which Connetics shall book the CGD Revenues. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained in this Agreement, and intending to be legally bound, the Parties agree as follows: *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 1 of 13 2 AGREEMENT SECTION 1 DEFINITIONS 1.1 ACTIMMUNE. "Actimmune" means the filled and finished form of the protein encoded by the interferon gamma-1b gene, and sold and distributed under the trademark ACTIMMUNE(R), which is owned by Genentech and licensed to Connetics and its sublicensees under the Genentech License. 1.2 ACTIMMUNE GROSS MARGIN. "Actimmune Gross Margin" means Actimmune Net Sales less all applicable [*]. 1.3 ACTIMMUNE GROSS SALES. "Actimmune Gross Sales" means [*]. 1.4 ACTIMMUNE NET SALES. "Actimmune Net Sales" means Actimmune Gross Sales less adjustments for the following: [*]. 1.5 ACTIMMUNE UNITS. "Actimmune Units" means vials of ACTIMMUNE(R) that are sold [*]. 1.6 BASELINE. "Baseline" means [*] Actimmune Units in 1999; [*] Actimmune Units in 2000; and [*] Actimmune Units in 2001, adjusted as applicable pursuant to Section 2.3(c). For clarity, the Parties intend that the applicable Baseline shall represent the sales of Actimmune Units for the treatment of CGD in each of the foregoing years. 1.7 CGD. "CGD" means chronic granulomatous disease, which is the only FDA approved indication for the sale of Actimmune as of the Effective Date. 1.8 COLLECTION PERIOD. "Collection Period" means one full calendar month during the Period. 1.9 CORD DISTRIBUTION COSTS. "CORD Distribution Costs" means the actual monthly payment by InterMune to CORD Logistics, Inc., for distribution services for sales of Actimmune up to the Baseline. 1.10 GNE ROYALTIES. "GNE Royalties" means the amount of royalties payable to Genentech, Inc. pursuant to Section 8.3 of the Genentech License for Actimmune Net Sales. 1.11 PERIOD. "Period" means the time from April 1, 1999 through December 31, 2001. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 2 of 13 3 1.12 PRODUCT COST. "Product Cost" means actual cost paid by InterMune to the manufacturer for each Actimmune Unit, regardless of whether the manufacturer is Genentech or a third party manufacturer qualified pursuant to the manufacturing transition contemplated by Section 3. 1.13 PRODUCT MANAGEMENT COSTS. "Product Management Costs" means InterMune's actual costs to manage sales of Actimmune Units for the treatment of CGD up to the Baseline, including all expenses and services related to sales of such Actimmune Units, such as maintenance of safety databases, etc., tracked on a regular basis and properly accounted for, at hourly rates to be agreed on by the Parties. SECTION 2 SERVICES PERFORMED; PAYMENTS 2.1 SERVICES. During the Period, InterMune shall perform, or have performed, order entry, packaging, shipping, invoicing, and credit and collection services (subject to Section 2.3(b)) related to sales of Actimmune Units. All such services shall be performed on a timely basis consistent with standard industry practices. 2.2 PRODUCT MANAGEMENT COSTS. Except for Product Management Costs, InterMune shall receive no separate consideration for providing services under this Agreement. No later than thirty (30) days after the end of each Collection Period, InterMune shall invoice Connetics for Product Management Costs for such Collection Period, and Connetics shall remit payment on such invoices within thirty (30) days after receipt of the invoice. InterMune's invoice shall be accompanied by a statement itemizing such Product Management Costs, including a list of all relevant projects, services provided, travel and other expenses. InterMune agrees that it will not include in Product Management Costs any non-headcount related expenses or extraordinary expenses without first obtaining Connetics' authorization to incur such expenses. Any expenses incurred with the consent of the Commercialization Committee formed pursuant to Section 2.7 shall be deemed to have been authorized by Connetics for purposes of this Section 2.2. 2.3 ACCOUNTING FOR ACTIMMUNE UNIT SALES; PAYMENTS TO CONNETICS. (a) Recording Revenue. During the Period, InterMune agrees that Connetics shall be entitled to book the Actimmune Net Sales until the total Actimmune Units sold reaches the Baseline applicable for each calendar year during the Period, all in accordance with generally accepted accounting principles, and InterMune will not book such Net Sales or otherwise record the revenue related to the Net Sales that Connetics is entitled to book pursuant to this Agreement. For clarification, the payment which Connetics receives from InterMune pursuant to subsection (c) below, and the sales of Actimmune Units represented thereby, shall accrue to the total Actimmune Net Sales booked by Connetics for 1999. InterMune shall be entitled to book the Actimmune Net Sales for sales of all Actimmune Units above the Baseline, after the Baseline is met in a given calendar year. (b) Payments to Connetics. InterMune shall pay to Connetics the amount of Actimmune Gross Margin each Collection Period, until the total Actimmune Units sold Page 3 of 13 4 reaches the applicable Baseline in each calendar year during the Period, according to the following schedule: no later than [*] business days after the end of each Collection Period, InterMune shall (i) submit to Connetics the reports required pursuant to Section 2.4 for the Collection Period just ended, and (ii) remit payment for the Collection Period immediately preceding such Collection Period, together with a statement as described in Section 2.4. For purposes of this Agreement, payments for a given Collection Period shall be due on the [*] business day after the end of the first full calendar month following that Collection Period ("Due Date"). To the extent that InterMune has not received payment for sales of Actimmune Units for a given Collection Period, InterMune's remittance on the Due Date may exclude any such unpaid amounts, but InterMune shall remit such amount withheld from Actimmune Gross Margin on the next Due Date, regardless of whether InterMune has received payment. Notwithstanding the foregoing, if such unpaid amount from a purchaser of Actimmune Units remains unpaid six (6) months after the date of invoice ("Bad Debt"), then Connetics shall reimburse InterMune for such Bad Debt within thirty (30) days following the end of such six month period. In such case, InterMune shall provide to Connetics the necessary documentation in its possession for the accounting for and collection of such Bad Debt, and shall permit Connetics to pursue collection for such Bad Debt. (c) Gross Margin for the First Quarter of 1999. InterMune will make a one-time payment to Connetics on the Effective Date equal to Actimmune Gross Margin for the period from January 15, 1999 to March 31, 1999, in the amount of [*], together with supporting documentation as described in this Article 2. The amount paid will count toward the total Actimmune Net Sales booked by Connetics for 1999, as set forth in paragraph (a) above. (d) Overdue Payments. For each Collection Period, if InterMune fails to remit payment by the Due Date, the amount due shall accrue interest at the rate of [*] per year until the amount due together with all accrued interest are paid in full. If InterMune fails for [*] consecutive Collection Periods to remit payment by the Due Date, InterMune hereby agrees that Connetics shall have the right (at its sole option) to modify the payment structure described in subsection (b) above so that Connetics collects all revenue with respect to sales of Actimmune Units, withholds the Actimmune Gross Margin, and remits the balance to InterMune. In such event: (i) InterMune shall take all action necessary to provide Connetics with the necessary permissions and authorization to make such modifications to the payment structure, in accordance with a payment and reporting schedule equivalent to that set forth in Subsection (b) above; (ii) The provisions of Sections 2.4 and 2.6 shall apply mutatis mutandis; and (iii) At the termination or expiration of this Agreement, Connetics' right to collect revenues for the sales of Actimmune Units shall terminate and InterMune shall thereafter have the right to collect all revenues for such sales. Connetics shall *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 4 of 13 5 take all action necessary to provide InterMune with the necessary permissions and authorization to allow InterMune to collect such revenues. (e) Sales Below Baseline. The Parties agree that, if Actimmune Unit sales are [*] or more below the Baseline (on a quarterly-adjusted basis) for a period of [*] days following [*] they will meet to evaluate the effect of [*] on sales volume compared with historical trends and other market dynamics. If the sales of Actimmune Units remain below the Baseline for the second [*] day period following such [*] the Parties agree to re-set the Baseline, provided that such lower sales are not attributable to an extraordinary circumstance, such as an interruption in supply. If, however, sales of Actimmune Units increase during such second [*] day period, the Parties agree to review the market dynamics and trends from prior years with respect to CGD patients, and to make a final decision regarding whether and to what extent to re-set the Baseline. The revised Baseline number shall be deemed to be the Baseline for all relevant purposes of this Agreement beginning with the date the revised Baseline is agreed upon (or such earlier date as the Parties may agree). If the Parties cannot agree on an appropriate adjustment to the Baseline following [*] as set forth in this subsection, then the proposals of each Party shall be referred for resolution according to the mechanism set forth in Section 5.9. (f) Sales Above the Baseline. During [*] if Actimmune Net Sales in any given calendar quarter exceed the Baseline (as may be adjusted pursuant to subsection (e) above) for that quarter by more than [*], Connetics agrees that it will [*] for the purpose of offsetting any deferred net profits that InterMune might have realized for such quarter had it been entitled to book those Actimmune Net Sales. The Parties agree to [*] in an amount that approximates the profits deferred by InterMune for Actimmune Unit sales above Baseline for the relevant quarter, [*] InterMune's right to book sales after Baseline is met for the year. [*] to be mutually agreed upon at the time of [*]. 2.4 MONTHLY STATEMENTS AND REPORTS TO BE PROVIDED BY INTERMUNE. On the [*] business day of each month, InterMune shall furnish to Connetics: (a) with respect to the Collection Period just ended, a report or reports (in a format reasonably acceptable to Connetics), listing the quantities of Actimmune Units sold and related sales dollars (itemized by customer and/or distributor), cost of Actimmune Units sold, inventory of Actimmune Units as of the end of the Collection Period, accounts receivable aging summary, returns, chargebacks, and rebates; and (b) with respect to the Collection Period ended a month earlier, payment of the Actimmune Gross Margin together with a statement that reconciles the payment submitted with the reports submitted for the same Collection Period in the prior month, and which includes all the information necessary to calculate Actimmune Gross Sales, Actimmune Net Sales, Actimmune Gross Margin and the payment made to Connetics. The principal *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 5 of 13 6 financial officer of InterMune shall certify that such monthly statement complies with this Agreement. In addition to the periodic reporting outlined above, InterMune shall continue to permit Connetics [*] as InterMune might use during the term of this Agreement. The initial report pursuant to subsection 2.4(a) shall be due on May 4, 1999, and the initial statement and payment pursuant to subsection 2.4(b) shall be due on June 2, 1999. InterMune's obligation to submit reports, statements and payments shall continue after the term of this Agreement, until all Collection Periods during the term have been fully accounted for. 2.5 ROYALTY PAYMENTS TO GENENTECH. InterMune shall remit to Genentech any amounts payable on Actimmune Net Sales for third party royalties and for GNE Royalties, all as required by the Genentech License. InterMune covenants and agrees to remit the full amount of such royalties directly to Genentech or the applicable third party, and shall [*] after the Effective Date and during the term of this Agreement. 2.6 AUDIT. During the term of this Agreement, and for [*] years after expiration or termination of this Agreement, InterMune shall permit an independent auditor, reasonably acceptable to InterMune, to have access to InterMune's records as may be necessary to verify the accuracy of the statements provided to Connetics under this Agreement, including Actimmune Gross Sales, Actimmune Net Sales, and Actimmune Gross Margin, and to assure that InterMune has complied with the payment terms of this Agreement. Such records shall be open during reasonable business hours for examination at Connetics' expense, and not more often than once each calendar year, by such independent auditor (who shall be required to enter into a binder of confidentiality with InterMune). 2.7 COMMERCIALIZATION COMMITTEE. The Parties shall establish a Commercialization Committee which shall be responsible for monitoring progress, managing information exchange between the Parties, deciding key strategies and solving problems with respect to commercialization and promotion of Actimmune for the CGD market. At the first meeting of the Commercialization Committee, the members shall establish a regular meeting time and structure, and appoint a secretary whose responsibility it will be to coordinate the timing, notice, and agendas for Commercialization Committee meetings. SECTION 3 MANUFACTURING COST TRANSITION 3.1 OFFSET TO TRANSITION COSTS. The Parties anticipate that the transfer of manufacturing to a third party manufacturer could result in a substantial reduction in the Product Cost for Actimmune. As an incentive to InterMune to complete the transfer of manufacturing of Actimmune to a third party manufacturer pursuant to Section 4.1 of the Genentech Supply Agreement before May 2001, and in consideration of an increase in Actimmune Gross Margin during the Period by virtue of such lower Product Cost, Connetics agrees to reimburse InterMune for [*] of InterMune's actual costs to effect such transfer of manufacturing up to a maximum *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 6 of 13 7 payment of [*] subject to adjustment as follows for each subsequent quarter that the transfer is not complete:
Amount Payable by Connetics* If Transfer is Complete by: - --------------------------- --------------------------- [*] [*]
- ---------------- * The amounts payable by Connetics listed above assume [*] as of the Effective Date). Accordingly, if the transition is completed by the target date but results in a [*] the amount payable by Connetics shall be [*]. By way of example, if the transfer is completed before [*]. 3.2 COMPLETION OF MANUFACTURING TRANSFER. For purposes of this Agreement, the transfer of manufacturing from Genentech to a third party manufacturer shall be deemed to be complete in the first Collection Period for which [*]. 3.3 PAYMENT TERMS. Any payment by Connetics pursuant to this Section 3 shall be payable in cash no later than thirty (30) days following completion of the manufacturing transfer as set forth in Section 3.2. SECTION 4 CONFIDENTIALITY 4.1 CONFIDENTIAL INFORMATION OBLIGATIONS. As used herein, "Confidential Information" means all information that a Party discloses to the other Party under this Agreement, provided that "Confidential Information" shall not include such information excluded under Section 4.2. Except to the extent expressly authorized by this Agreement or otherwise agreed in writing by the Parties, each Party agrees that, during the term of this Agreement and for [*] after the expiration or termination of this Agreement, it shall keep confidential and shall not publish or otherwise *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 7 of 13 8 disclose and shall not use for any purpose other than as provided for in this Agreement any Confidential Information furnished to it by the other Party pursuant to this Agreement. 4.2 EXCEPTIONS. The obligations set forth in Section 4.1 shall not apply to any Information that the receiving Party can demonstrate by competent evidence: (a) was already known to the receiving Party, other than under an obligation of confidentiality, at the time of disclosure by the other Party; (b) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving Party by the other Party; (c) became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving Party in breach of this Agreement; (d) was disclosed to the receiving Party, other than under an obligation of confidentiality to a third Party, by a third Party who had no obligation to the disclosing Party not to disclose such information to others; or (e) is independently developed by the receiving Party without using any of the other Party's Confidential Information. 4.3 PERMITTED DISCLOSURE. Notwithstanding the limitations in this Article 4, each Party may disclose Confidential Information belonging to the other Party (or otherwise subject to this Article 4), to the extent such disclosure is reasonably necessary in the following instances, but solely for the limited purpose of such necessity: (a) regulatory and tax filings; (b) prosecuting or defending litigation; (c) complying with applicable governmental laws or regulations or valid court orders; or (d) disclosure to affiliates, employees, consultants or agents who agree to be bound by similar terms of confidentiality and non-use at least equivalent in scope to those set forth in this Article 4. Notwithstanding the foregoing, in the event a Party is required to make a disclosure of the other Party's Confidential Information pursuant to Section 4.4, it will give reasonable advance notice to the other Party of such disclosure and endeavor in good faith to secure confidential treatment of such information. In any event, the Parties agree to take all reasonable action to avoid disclosure of Confidential Information hereunder. Further, the Parties agree to consult with one another on the provisions of this Agreement to be redacted in any filings made by a Party with the United States Securities and Exchange Commission or as otherwise required by law. Page 8 of 13 9 SECTION 5 GENERAL PROVISIONS 5.1 NO OFFSET. Neither Party shall be entitled to offset any amounts due to the other Party under this Agreement against any amounts due from such other Party pursuant to this Agreement or other agreements between the Parties. Notwithstanding the foregoing sentence, any amounts due to a Party under this Agreement that are [*] or more days overdue may be offset by such Party against any amounts such Party owes the other Party under this Agreement. 5.2 SURVIVAL. The payment and reporting obligations set forth in Article 2, and the provisions of Section 2.6 and Article 4 shall survive any expiration or termination of this Agreement, as will all rights accrued and obligations incurred hereunder prior to such expiration or termination. 5.3 TERM AND TERMINATION. The term of this Agreement shall coincide with the Period, and this Agreement will expire with no further action required by either Party on December 31, 2001. In addition, either Party may terminate this Agreement on no less than [*] days' notice to the other Party for material breach of this Agreement by that Party. 5.4 WAIVER. No waiver by either Party of any breach or default of any of the covenants or agreements set forth in this Agreement shall be deemed a waiver as to any subsequent or similar breach or default. 5.5 ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Parties and their permitted successors and assigns; provided, however, that neither Party shall assign any of its rights and obligations under this Agreement without the prior written consent of the other Party, except as incident to the merger, consolidation, reorganization or acquisition of stock or assets affecting substantially all of the assets or actual voting control of the assigning Party. Any assignment or attempted assignment by either Party in violation of the terms of this Section 4.2 shall be null and void and of no legal effect. 5.6 NOTICES. Any notice or other communication required or permitted to be given to either Party shall be in writing and shall be deemed to have been properly given and to be effective on the date of delivery if delivered in person or by facsimile or five (5) days after mailing by registered or certified mail, postage paid, to the other Party at the following address: In the case of InterMune: InterMune, Inc. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 9 of 13 10 3294 West Bayshore Road Palo Alto, CA 94303 Fax: (650) 858-2937 Attention: President In the case of Connetics: Connetics Corporation 3400 West Bayshore Road Palo Alto, CA 94303 Fax: (650) 843-2899 Attention: Chief Executive Officer Either Party may change its address for communications by a notice to the other Party in accordance with this Section. 5.7 HEADINGS. The headings of the several sections are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 5.8 AMENDMENT. No amendment or modification hereof shall be valid or binding upon the Parties unless made in writing and signed by both Parties. 5.9 GOVERNING LAW. This Agreement shall be governed exclusively by the laws of the California, as such law applies to contracts entered into between and to be performed by California residents entirely in California. 5.10 DISPUTE RESOLUTION. (a) In the event of any controversy or claim arising out of, relating to or in connection with any provision of this Agreement, or the rights or obligations of the Parties, the Parties shall try to settle their differences amicably between themselves by referring the disputed matter to the President of InterMune and the Chief Executive Officer of Connetics for discussion and resolution. Either Party may initiate such informal dispute resolution by sending written notice of the dispute to the other Party, and within ten (10) days after such notice such representatives of the Parties shall meet for attempted resolution by good faith negotiations. (b) If such personnel are unable to resolve such dispute within thirty (30) days of initiating such negotiations, either Party may seek to have such dispute resolved by binding arbitration under this Section 5.9. The arbitration shall be held in Palo Alto, California according to the Commercial Arbitration Rules of the American Arbitration Association (the "Rules"). The arbitration will be conducted by a panel of three (3) arbitrators who are knowledgeable in the subject matter that is at issue in the dispute, are not affiliated directly or indirectly with either Party, and are selected by mutual agreement of the Parties. Failing such agreement, the arbitrators shall be selected appointed as provided in the Rules. During the arbitration, the Parties shall have such discovery rights as the arbitrators may allow, consistent with the discovery permitted by the Federal Code of Civil Procedure. In conducting the arbitration, the arbitrators shall apply the rules of evidence applicable in California, and shall be able to decree any and all relief of an equitable nature, including but not limited to such relief as a temporary restraining order, a preliminary injunction, or a Page 10 of 13 11 permanent injunction, as well as specific performance. The arbitrators shall also be able to award direct and indirect damages, but shall not award any other form of damage (e.g., punitive or exemplary damages). (c) The reasonable fees and expenses, of the arbitrators, along with the reasonable legal fees and expenses of the prevailing Party (including all expert witness fees and expenses), the fees and expenses of a court reporter, and any expenses for a hearing room, shall be paid as follows: If the arbitrators rule in favor of one Party on all disputed issues in the arbitration, the losing Party shall pay 100% of such fees and expenses; if the arbitrators rule in favor of one Party on some issues and the other Party on other issues, the arbitrators shall issue with the rulings a written determination as to how such fees and expenses shall be allocated between the Parties. The arbitrators shall allocate fees and expenses in a way that bears a reasonable relationship to the outcome of the arbitration, with the Party prevailing on more issues, or on issues of greater value or gravity, recovering a relatively larger share of its legal fees and expenses. (d) The decision of the arbitrators shall be final and may be entered, sued on or enforced by the Party in whose favor it runs in any court of competent jurisdiction at the option of such Party. Whether a claim, dispute or other matter in question would be barred by the applicable statute of limitations, which statute of limitations also shall apply to any claim or disputes subject to arbitration under this Section, shall be determined by binding arbitration pursuant to this Section. 5.11 FORCE MAJEURE. Any delays in performance by any Party under this Agreement shall not be considered a breach of this Agreement if and to the extent caused by occurrences beyond the reasonable control of the Party affected, including but not limited to acts of God, embargoes, governmental restrictions, fire, flood, explosion, riots, wars, civil disorder, rebellion or sabotage. The Party suffering such occurrence shall immediately notify the other Party as soon as practicable, and any time for performance hereunder shall be extended by the actual time of delay caused by the occurrence. 5.12 INDEPENDENT CONTRACTORS. In making and performing this Agreement, InterMune and Connetics act and shall act at all times as independent contractors and nothing contained in this Agreement shall be construed or implied to create an agency, partnership or employer and employee relationship between InterMune and Connetics. At no time shall one Party make commitments or incur any charges or expenses for or in the name of the other Party. 5.13 SEVERABILITY. If any part of this Agreement is declared invalid by any legally governing authority having jurisdiction over either Party, then such declaration shall not affect the remainder of the Agreement and the Parties shall revise the invalidated part in a manner that will render such provision valid without impairing the Parties' original interest. 5.14 CUMULATIVE RIGHTS. The rights, powers and remedies under this Agreement shall be in addition to, and not in limitation of, all rights, powers and remedies provided at law or in equity, or under any other agreement between the Parties. All of such rights, powers and remedies shall be cumulative, and may be exercised successively or cumulatively. 5.15 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be an original and all of which shall constitute together the same document. Page 11 of 13 12 5.16 ENTIRE AGREEMENT. This Agreement, in conjunction with the other "Intercompany Agreements" (as that term is described in the Collaboration Agreement), embodies the entire understanding of the Parties with respect to the subject matter of the Intercompany Agreements, and supersedes and terminates all previous communications, representations or understandings, either oral or written, between the Parties relating to the subject matter of the Intercompany Agreements. [INTENTIONALLY LEFT BLANK] SIGNATURE PAGE FOLLOWS Page 12 of 13 13 IN WITNESS WHEREOF, both InterMune and Connetics have executed this Agreement, as of the day and year first written above. INTERMUNE PHARMACEUTICALS, INC. CONNETICS CORPORATION By: /s/ W. Scott Harkonen By: /s/ T. Wiggans ------------------------- ------------------------------------- Name: W. Scott Harkonen Name: Thomas G. Wiggans ------------------------- ------------------------------------- Title: President Title: President and Chief Executive Officer ------------------------- ------------------------------------- Page 13 of 13 EX-27.1 11 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 15,646 6,813 1,201 0 590 273 4,246 2,633 31,123 13,959 0 0 0 109,923 (98,680) 31,123 2,161 7,161 1,171 1,171 11,955 0 292 (5,923) 0 0 0 0 0 (5,923) (0.28) (0.28)
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