-----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, EuzJnW3D/wDpqXBGmXqIx3teWLLpmWjmm/ntdszX/IzxV42oi19Q2bQDiLzkVNLs c/l2TEg2MAo7z5xrT/l0/Q== 0000891618-98-005364.txt : 19981217 0000891618-98-005364.hdr.sgml : 19981217 ACCESSION NUMBER: 0000891618-98-005364 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19981216 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: S-3 SEC ACT: SEC FILE NUMBER: 333-69055 FILM NUMBER: 98770827 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 S-3 1 FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 16, 1998 REGISTRATION NO. 333-______________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 CONNETICS CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE 94-3173928 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 3400 WEST BAYSHORE ROAD PALO ALTO, CA 94303 (650) 843-2800 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) THOMAS G. WIGGANS PRESIDENT AND CHIEF EXECUTIVE OFFICER CONNETICS CORPORATION 3400 WEST BAYSHORE ROAD PALO ALTO, CA 94303 (650) 843-2800 (Name, address, including zip code, and telephone number, including area code, of agent for service) APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. If the only securities being registered on this Form are to be offered pursuant to dividend or interest reinvestment plans, please check the following box [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.[ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] 2 CALCULATION OF REGISTRATION FEE
========================================================================================================================= PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF SHARES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE ========================================================================================================================= Common Stock, $0.001 par value per share................ 3,572,548 shares $4.09 $14,611,721.32 $4,063.00 =========================================================================================================================
(1) Estimated solely for the purpose of computing the amount of the registration fee based on the average of the high and low prices of the Common Stock as reported on the Nasdaq National Market on December 9, 1998 pursuant to Rule 457(c). THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. Page 2 3 THE INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PRELIMINARY PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED DECEMBER 16, 1998 CONNETICS CORPORATION 3,572,548 SHARES COMMON STOCK This Prospectus relates to 3,572,548 shares of Connetics Common Stock, $0.001 par value, (the "Shares") which may be offered for the account of several stockholders of Connetics (the "Selling Stockholders") and will not be underwritten. Of the Shares being registered hereby for the Selling Stockholders, (1) 3,167,500 were issued to several private investors in a private placement on November 20, 1998 (the "Private Placement") pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), (2) 380,048 were issued to Genentech, Inc. in May 1998 under the Company's obligation to issue equity to Genentech, Inc. in connection with the Company's acquisition of rights to interferon gamma, and (3) 25,000 were authorized for issuance as shares of restricted stock to Kirk Raab, a director of the Company. The shares issued to Kirk Raab were issued on November 5, 1998. The Selling Stockholders may sell the Shares from time to time on the over-the-counter market in regular brokerage transactions, in transactions directly with market makers or in certain privately negotiated transactions. We will not receive any proceeds from the sale of the Shares by the Selling Stockholders. We have agreed to pay certain expenses of the Selling Stockholders. See "Plan of Distribution." The Selling Stockholders and any broker-dealers, agents or underwriters that participate with the Selling Stockholders in the distribution of the Shares may be deemed to be an "Underwriter" within the meaning of Section 2(11) of the Securities Act, and any commissions received by them and any profit on the resale of the Shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. See "Plan of Distribution" for a description of indemnification arrangements. 4 Our Common Stock is quoted on the Nasdaq National Market System (the "Nasdaq") under the symbol "CNCT". On December 11, 1998, the last sale price of our Common Stock on the Nasdaq was $4.125 per share. SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR A DISCUSSION OF MATERIAL RISKS INFORMATION THAT YOU SHOULD CONSIDER IN CONNECTION WITH THE PURCHASE OF SECURITIES OFFERED HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is December 16, 1998 Page 4 5 TABLE OF CONTENTS
PAGE Available Information 6 Documents Incorporated by Reference 6 The Company 8 Risk Factors 11 Use of Proceeds 22 Indemnification of Officers and Directors 23 Issuance of Common Stock to Selling Stockholders 23 Selling Stockholders 23 Plan of Distribution 25 Legal Matters 26 Experts 26 Additional Information 26
Page 5 6 NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING STOCKHOLDERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SHARES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files proxy statements, reports and other information with the Securities and Exchange Commission (the "Commission"). This filed material can be inspected and copied at regional offices of the Commission located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York 10048; and at the Public Reference Office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission also maintains a World Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy and information statements and other information regarding the Company and other companies that file electronically with the Commission. INFORMATION INCORPORATED BY REFERENCE The following documents filed by the Company with the Commission File No. 27406 are incorporated by reference in this Prospectus: 1. The Company's Annual Report on Form 10-K for the year ended December 31, 1997. 2. The Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. 3. The Company's Current Report on Form 8-K filed May 6, 1998. Page 6 7 4. The Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 5. The Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 6. The description of the Company's Common Stock set forth in the Company's Registration Statement on Form 8-A filed with the Commission on December 8, 1995, including any amendment thereto or report filed for the purpose of updating such description. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the offering of the Common Stock offered hereby shall be deemed to be incorporated by reference in this Prospectus. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes hereof to the extent that a statement contained herein (or in any other subsequently filed document which also is incorporated by reference herein) modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed to constitute a part hereof, except as so modified or superseded. The Company will furnish without charge to each person, including any beneficial owner, to whom this Prospectus is delivered, on the written or oral request of such person, a copy of any or all of the documents incorporated by reference, other than exhibits to such documents. Requests should be directed to John Higgins, Chief Financial Officer, Connetics Corporation, 3400 West Bayshore Road, Palo Alto, California 94303, telephone: (650) 843-2800. The "C with interlocking hemisphere" logo (used alone and with the Company's name), "Connetics(R)", "ConXn(R)" and "Ridaura(R)" and "Luxiq" and "OLUX" are trademarks of the Company. All other tradenames and trademarks appearing in this Prospectus are the property of their respective holders. Connetics Corporation ("Connetics" or the "Company") was incorporated in the State of Delaware on February 8, 1993. Page 7 8 SPECIAL NOTE: THE FOLLOWING DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS OR EVENTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN SUCH FORWARD-LOOKING STATEMENTS. POTENTIAL RISKS AND UNCERTAINTIES INCLUDE, WITHOUT LIMITATION, THOSE FACTORS BELOW UNDER THE HEADING "ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS." THE COMPANY The Company is focused on the development and commercialization of therapeutics to address serious diseases involving the connective tissues of the body. Connective tissues are components of the body that form structural or binding elements such as skin, joints, ligaments and lining of organs, and form the three-dimensional structure that allows cells to function normally. The diseases or conditions initially addressed by the Company include scleroderma, rheumatoid arthritis, and psoriasis. Patients suffering from these conditions experience a variety of chronic problems depending on the particular condition, including hardening of the skin and internal organs, severe scarring, lack of mobility and extensive rashes and lesions. The most severe of these diseases cause painful disfigurement, disability and, in certain cases, death. The Company estimates that over five million Americans suffer from its targeted diseases in their various forms, with over five billion dollars spent annually on treatments that are mostly palliative in nature. The Company has several products in development addressing these disease indications: ConXn(R) (recombinant human relaxin H2) ("relaxin"), Luxiq(TM) (betamethasone valerate quick break foam), OLUX(TM) (clobetasol propionate quick break foam), and through its wholly-owned subsidiary, interferon gamma (1b) ("interferon gamma"). In December 1996, the Company acquired the exclusive U.S. rights to Ridaura(R) (auranofin), an approved disease modifying antirheumatic drug approved for sale, from SmithKline Beecham Corporation and affiliated entities ("SmithKline"). Relaxin. Relaxin is a naturally occurring protein that is known to promote remodeling of connective tissues. The Company is developing relaxin for the treatment of scleroderma, as well as other connective tissue diseases. Scleroderma, a disorder characterized by thickening and hardening of the skin and internal organs, generally afflicts women in their child-bearing years. Scleroderma can cause extensive disfigurement and quality of life impairment, making it impossible for afflicted patients to carry out the most routine daily functions. This disease affects over 300,000 individuals in the United States and, in its severe form (known as systemic sclerosis, which affects approximately 70,000 individuals in the U.S.), has a five-year mortality rate of 50%-70%. Research by two of the Company's founders and their colleagues has shown that relaxin can inhibit excessive connective tissue formation and promote connective tissue remodeling. Results from several clinical trials in individuals with systemic sclerosis indicated that continuous administration of relaxin was well tolerated, without any serious drug-related adverse effects. In June 1997, the Company announced results of a 64 patient Phase II clinical trial which showed that administration of relaxin caused a statistically significant reduction in skin score (a measure of disease progression) and a trend toward improvement in eleven other disease parameters. Thus, relaxin may have a beneficial effect on connective tissue turnover and may provide a treatment for scleroderma. The Company anticipates that it will begin a pivotal Page 8 9 trial of relaxin in 1999. The Company has also conducted a preclinical animal study that demonstrated Relaxin's potential ability to inhibit pulmonary (lung) fibrosis and is conducting preclinical studies with relaxin in liver and cardiac fibrosis, and infertility. Luxiq(TM). The Company has an exclusive license to develop and market Luxiq (a quick break foam formulation of the dermatologic drug, betamethasone valerate) in North America. The product has been approved for sale in the United Kingdom and is being marketed in the U.K. by Evans Medical Ltd. In the United States, the product is referred to by the tradename Luxiq(TM). In August 1997, the Company announced that results from its Phase III clinical trial with Luxiq demonstrated statistically significant improvement over both placebo and betamethasone lotion for the treatment of scalp psoriasis, a condition that affects over three million persons in the United States. In December 1997, the Company submitted a New Drug Application (an "NDA") with the FDA to market the product for use in all steroid-responsive dermatoses, including psoriasis. OLUX(TM). Following its development progress with Luxiq, the Company is now developing a second quick-break foam product with the tradename OLUX. OLUX is a quick break foam formulation of clobetasol propionate, a super high potency corticosteriod. In January 1998, the Company acquired exclusive rights to develop and market the drug in North America. During the quarter ended September 30, 1998, the Company initiated and completed treatment in a Phase III clinical trial of Olux intended for the treatment of severe scalp psoriasis and other corticosteroid-responsive dermatoses of the scalp. The Phase III trial was a multicenter, randomized, double-blind study of approximately 190 scalp psoriasis patients which compared Olux to a currently approved clobetasol solution and to placebo during a two week treatment regimen. The primary endpoints for the trial included changes in the clinical signs of psoriasis: plaque thickness scaling, erythema (redness), and the global response to treatment as judged by the investigator. Decreases in itching and the patient's assessment of improvement were also evaluated. On November 11, 1998, the Company announced that the outcome of the trial was positive and that the Company anticipates filing an NDA in 1999. Ridaura(R). In December 1996, the Company acquired the exclusive U.S. and Canadian rights to Ridaura (auranofin), a disease modifying antirheumatic drug, from SmithKline. Ridaura is an established therapy for rheumatoid arthritis, an autoimmune disease that afflicts one to two percent of adult Americans (approximately three million people), mostly women. Under its agreement with SmithKline, the Company acquired all U.S. and Canadian rights, title and interest to Ridaura, including intellectual property rights, along with related assets such as customer lists, contracts, product files and unfilled customer orders. The primary patents for Ridaura expired in 1989 and 1992. Connetics began marketing Ridaura through in its own sales force in mid-1997. Through agreements with SmithKline, customer orders and distribution for the product were managed by SmithKline through 1997, and SmithKline will manufacture and supply Ridaura in final finished package form to the Company for an initial term of five years. The Company has established a relationship with CORD Logistics, Inc. ("CORD"), a distribution company located in Nashville, Tennessee and has been shipping Ridaura through CORD since December 15, 1997. In December 1997, the Company sold the Canadian rights to Ridaura to, and entered into a supply agreement with, Pharmascience Inc., a Canadian company, for a net consideration of $1,300,000. Page 9 10 TCR Vaccines. The Company holds certain patents that permit it to develop TCR vaccines for the treatment of autoimmune diseases. While the results of pilot clinical studies using TCR vaccines for the treatment of rheumatoid arthritis and multiple sclerosis were encouraging, the Company has suspended most of its activity with respect to TCR, to permit it to focus its resources on products closer to market. Interferon gamma. Interferon gamma is one of a family of proteins involved in the regulation of the immune system and has been shown to reduce the frequency and severity of infections in patients. Interferon gamma is approved by the FDA for the reduction in frequency and severity of infection in a rare, serious immune disease, known as chronic granulomatous disease ("CGD"). In May 1998, the Company entered into a license agreement with Genentech, Inc., under which the Company received an exclusive license under certain patent rights and know-how to Actimmune(R) (Interferon gamma) for the treatment of infections in CGD and several additional indications (non-cancer dermatological diseases; infectious diseases; infections in osteopetrosis; pulmonary fibrosis; and asthma) in the United States. The parties also entered into a Supply Agreement under which Genentech will manufacture and supply interferon gamma, in bulk product or finished product form. The Company has formed a subsidiary corporation, InterMune Pharmaceuticals, Inc. to further develop and market interferon gamma for infectious disease applications. Clinical studies are underway evaluating interferon gamma's role as a potential therapy for infections associated with osteopetrosis; for atypical mycobacterial infections; and as a treatment for multiple-drug resistant tuberculosis. In addition, the Company has conducted a Phase II clinical trial for the treatment of keloids, which are unsightly, painful, elevated scars resulting from collagen overproduction. In August 1997, the Company also announced results from a Phase III trial of interferon gamma for the treatment of atopic dermatitis that indicated that the product did not show an acceptable therapeutic response with respect to the primary clinical endpoint. As a result, the Company suspended plans to submit a Biological License Application ("BLA") for interferon gamma for the treatment of atopic dermatitis. Corporate Strategy. The Company's strategy is to: (1) focus on the development and commercialization of products targeting the rheumatology and dermatology markets, which can be effectively served by focused and specialized sales and marketing activities, (2) expand its existing product portfolio and pursue early commercialization opportunities by in-licensing other therapeutically related products that are already marketed or in late-stage clinical development, (3) use corporate partnerships to pursue new business opportunities and overseas licensing of the Company's products in development, (4) leverage its product development and commercialization expertise by pursuing additional specialized diseases and markets, and (5) minimize drug discovery costs, manufacturing costs and capital requirements. The Company's principal executive offices are located at 3400 West Bayshore Road, Palo Alto, California 94303. Its telephone number is (650) 843-2800. The Company maintains an internet website at http://www.connetics.com. Page 10 11 RISK FACTORS This Prospectus (including the documents incorporated by reference in this Prospectus) contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding the Company's expectations, beliefs, intentions or future strategies. All forward looking statements included in this document are based on information available to the Company on the date of this Prospectus, and the Company assumes no obligation to update any such forward looking statements. Actual results could differ materially from those projected in the forward looking statements as a result of the risk factors set forth below and in the documents incorporated by reference in this Prospectus. In evaluating the Company's business, prospective investors should carefully consider the following risk factors in addition to the other information set forth in this Prospectus or incorporated by reference in this Prospectus. WE ARE AT AN EARLY STAGE OF DEVELOPMENT AND ARE SUBJECT TO UNCERTAINTIES ASSOCIATED WITH PRODUCT DEVELOPMENT AND MARKET ACCEPTANCE. From its inception until its acquisition of Ridaura in December 1996, Connetics was a development stage company. Except for Ridaura and Actimmune, all of the Company's products are in clinical or preclinical development or are pending approval by the FDA, and no revenues were generated from products until December 1996. To date, the Company's resources have been primarily dedicated to the research and development of products that the Company has in-licensed. Although the Company believes it has the expertise to develop and commercialize its products, any or all of the Company's products may fail to be effective or prove to have undesirable and unintended side effects or other characteristics that may prevent their development or regulatory approval, or limit their commercial use. There can be no assurance that the Company, or its collaborative partners, will be permitted to undertake human clinical trials for any of their development products not currently in clinical trials or, if permitted, that such products will be demonstrated to be safe and effective. In addition, there can be no assurance that any of the Company's products under development will obtain approval from the FDA or equivalent foreign authorities for any indication or that an approved compound will be capable of being produced in commercial quantities at reasonable costs and successfully marketed. Even if such products become commercially available, there can be no assurance that the Company will be able to gain satisfactory market acceptance for such products. WE HAVE A LIMITED OPERATING HISTORY AND A HISTORY OF LOSSES. OUR ABILITY TO ACHIEVE OR, IF ACHIEVED, SUSTAIN PROFITABILITY, IS HIGHLY UNCERTAIN. Due to its limited operating history, the Company is subject to the uncertainties and risks associated with any new business. Having no commercialized products until the December 1996 Ridaura acquisition, the Company has experienced operating losses every year since its incorporation. Net losses for the fiscal years ended December 31, 1997, 1996 and 1995 were Page 11 12 $27.9 million, $18.5 million and $10.4 million, respectively, and the Company had an accumulated deficit of $65.9 million at December 31, 1997. Additionally, the Company continues to incur net losses. The Company incurred net losses of $20.6 million in the nine months ended September 30, 1998, compared with $23.0 million for the corresponding period in 1997. Pursuant to the interferon gamma license agreement with Genentech in May 1998, the Company recorded a $4.0 million non-cash charge for a license fee in the quarter ended June 30, 1998. Other than the $4.0 million charge, the decrease of $2.4 million in net losses for the nine months ended September 30, 1998 from the same period in 1997 was primarily due to a decrease of approximately $6.2 million in development activities, lower amortization costs due to the sale of Canadian rights to Ridaura and an additional $1.6 million in licensing revenue in connection with the agreement with Suntory Pharmaceuticals for relaxin. The decreases were offset in part by higher selling, general and administrative expenses. The Company expects 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, possible acquisitions of new products and technologies, scale-up activities and clinical activities. The time required by the Company to reach profitability is uncertain and there can be no assurance that the Company will ever be able to generate revenue from its products now under development or achieve profitability on a sustained basis. WE ARE SUBJECT TO RISKS RELATED TO THE MANAGEMENT OF THE MARKETING AND SALES OF OUR RIDAURA PRODUCT. IN ADDITION, FUTURE REVENUES FROM SALES OF RIDAURA ARE UNCERTAIN. WE ARE ALSO SUBJECT TO PATENT RISKS RELATED TO RIDAURA. The Company's success will depend in part on its ability to manage the marketing and sales of Ridaura. The Company has established a relationship with CORD, a distribution company located in Nashville, Tennessee and has been shipping Ridaura through CORD since December 15, 1997. If CORD were to become unable to continue to distribute Ridaura in an effective manner or if the Company is unable to maintain sufficient personnel with the appropriate levels of experience to manage this function, the Company's business, financial condition and results of operations could be materially and adversely affected. In addition, there can be no assurance that the Company's Ridaura revenues will equal or exceed those achieved by SmithKline over the last several years. If the Company is not able to market and sell Ridaura successfully, the Company's business, financial condition and results of operations could be adversely affected. Furthermore, the absence of patent protection for Ridaura means that the Company will be unable to assert patent infringement claims against a third party marketing the same product under a different trade name, which could have a material adverse effect on the Company's business, financial condition, and results of operations. OUR PRODUCT REVENUES MAY FLUCTUATE FROM PERIOD TO PERIOD IN THE FUTURE. The Company had no revenues from products from its inception until December 1996, when it recognized $428,000 in December product revenues from Ridaura. For the year ended December 31, 1997, the Company recognized $6.8 million in product revenue from Ridaura. There can be no assurance that growth in Ridaura revenue will be achieved, that current revenue levels will be maintained, or that the Company will ever be profitable on a quarterly or annual basis. As noted above, the Company expects to incur quarterly and annual operating losses for at Page 12 13 least the next few years. The Company's quarterly and annual operating results may fluctuate significantly in the future depending on such factors as the timing and shipment of significant Ridaura orders, if any, changes in pricing policies by the Company and its competitors, the timing and market acceptance of any new products introduced by the Company, the mix of distribution channels through which Ridaura and other products (if any) are sold, and the Company's inability to obtain sufficient supplies for its products. In response to competitive pressures or new product introductions, the Company may take certain pricing or other actions that could materially and adversely affect the Company's operating results. WE WILL NEED TO RAISE CAPITAL IN THE FUTURE. FUTURE FINANCINGS COULD HAVE A DILUTIVE EFFECT ON STOCKHOLDERS OF THE COMPANY. The Company has financed its operations to date primarily through private sales of equity securities and proceeds from its initial public offering in February 1996 and six self-managed financings. As of September 30, 1998, cash, cash equivalents, short-term investments and long-term restricted cash totalled $12.8 million, a decrease of $1.5 million from December 31, 1997. On November 20, 1998, the Company completed a private placement financing through which the Company raised $12.7 million. As a result of this financing, the Company has raised a total of $22.7 million through sales of Common Stock in 1998. The Company believes that its existing cash, cash equivalents and short-term investments along with cash generated from the sales of Ridaura and from financings, will be sufficient to fund the Company's operating expenses, debt obligations and capital requirements through 1999. The Company has an equity line agreement with an investor that may potentially provide the Company access to capital through sales of its Common Stock. The equity line is available for a three-year term which began on June 26, 1998. During the three year term, if the stock meets certain volume restrictions and trades above $10.00, then up to $500,000 could be drawn by the Company approximately every three months in exchange for the sale of stock at an approximate minimum price of $10.00. On May 5, 1998, the Company entered into a license agreement with Genentech under which the Company received an exclusive license under certain patent rights and know-how to Actimmune (interferon gamma) for the treatment of chronic granulomatous disease ("CGD") and several additional indications (non-cancer dermatological diseases, infectious diseases, osteopetrosis, pulmonary fibrosis and asthma) in the United States. Under the terms of the agreement, the Company issued Genentech 380,048 shares of common stock valued at $2.0 million at the time of closing, with a guaranteed future value of $4.0 million at December 28, 1998. In the event that the future value of such shares is less that $4.0 million at December 28, 1998, the Company will have to either issue additional shares or pay cash to Genentech to make up the difference. In October 1998, the Company formed a subsidiary corporation, InterMune Pharmaceuticals, Inc., to further develop and market interferon gamma. The Company's future capital uses and requirements depend on numerous factors, including the progress of its research and development programs, the progress of clinical and advanced-stage 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, the ability of the Company to establish collaborative arrangements, the level of product revenues, the possible acquisition of new Page 13 14 products and technologies, and the development of commercialization activities, and therefore such capital uses and requirements may increase in future periods. As a result, the Company will require substantial 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, the Company currently has no commitments for any additional financings. There can be no assurance that additional funding will be available for the Company to finance its ongoing operations when needed or that adequate funds for the Company's operations, whether from financial markets, collaborative or other arrangements with corporate partners or from other sources, will be available when needed or on terms attractive to the Company. Any additional equity financing, if available, will have a dilutive impact on other stockholders and any debt financing, if available, may restrict the Company's ability to pay dividends on its capital stock or the manner in which the Company conducts its business. The inability to obtain sufficient funds may require the Company to delay, scale back or eliminate some or all of its research and product development programs, to limit the marketing of its products or to license third parties the rights to commercialize products or technologies that the Company would otherwise seek to develop and market itself. A KEY ELEMENT OF OUR STRATEGY IS TO ACQUIRE PRODUCTS AND THERE ARE RISKS ASSOCIATED WITH SUCH ACQUISITIONS. A significant part of the Company's overall strategy is to in-license or acquire additional marketed or late-stage development products in its targeted therapeutic areas. The 1996 acquisitions of rights to Luxiq and Ridaura reflect this strategy. Future product acquisitions, if any, may require substantial additional funds (1) for the initial acquisition of rights to these products and (2) for the steps necessary to obtain FDA approval for the product and to market, sell and distribute the product successfully. A portion of the funds needed to acquire, develop and market any new products may come from the Company's existing cash and short-term investments; in such case, fewer resources will be available to the Company's current products and clinical programs, which could have a material adverse effect on the Company's business, financial conditions and results of operations. Alternatively, the Company may seek to raise substantial additional funds for new product acquisitions. As discussed above under "We will need to raise capital in the future. Future financings could have a dilutive effect on stockholders of the Company." the Company may seek such additional funding through collaborative arrangements and through public or private financings, including equity financings. In addition, any acquisition of rights to additional products that are not presently approved by the FDA will require the commitment of substantial resources to conduct the research and development, clinical studies and regulatory activities necessary to bring such potential product to market. In addition, if the newly-acquired product is already approved for sale, the Company will likely be assuming the marketing, sale and distribution of such product, which may require the Company to recruit a substantial number of qualified employees to perform these functions. If the Company is unable to hire a sufficient number of employees with the appropriate levels of experience, or if the Company is unable to effectively manage the integration of any newly-acquired products into the Company's product line, the Company's business, financial condition and results of operations could be materially and adversely affected. Finally, any newly-acquired products may not achieve the marketing or therapeutic success expected of it by the Company, industry analysts or others at the time of acquisition. Page 14 15 CLINICAL TRIALS ARE INHERENTLY UNPREDICTABLE, AND WE HAVE LIMITED EXPERIENCE IN CONDUCTING PRECLINICAL AND CLINICAL TRIALS. During 1998 the Company concluded a Phase III trial of OLUX for the treatment of severe psoriasis and skin dermatoses and a Phase II trial of interferon gamma for the treatment of keloids. The Company anticipates commencing a pivotal trial of ConXn for the treatment of scleroderma in 1999. There can be no assurance that the Company will be able to commence any future trials or successfully complete them once started. In addition, there can be no assurance that the Company will meet its development schedule for any of its products in development. If the Company were unable to commence clinical trials as planned, complete the clinical trials or demonstrate the safety and efficacy of its products, the Company's business, financial condition and results of operations would be materially and adversely affected. Even if a product from the Company's research and development programs or any other therapeutic product is successfully developed according to plans, there can be no assurance it will be approved by the FDA on a timely basis or at all. In addition, because the Company will, in a number of cases, rely on its contractual rights to access data collected by others in phases of its clinical trials, the Company is dependent on the continued satisfaction by such parties of their contractual obligations to provide such access and cooperate with the Company in the execution of successful filings with the FDA. There can be no assurance that the FDA will permit such reliance. If the Company were unable to rely on clinical data collected by others, the Company may be required to repeat clinical trials, which could significantly delay commercialization, and require significantly greater capital. Before obtaining regulatory approvals for the commercial sale of any of its products under development, the Company must demonstrate through preclinical studies and clinical trials that the product is safe and efficacious for use in the target indication for which approval is sought. The results from preclinical studies and early clinical trials may not be predictive of results that will be obtained in later-stage testing and there can be no assurance that the Company's future clinical trials will demonstrate the safety and efficacy of any products or will result in approval to market products. A number of companies in the biotechnology industry have suffered significant setbacks in advanced clinical trials, even after promising results from earlier trials. The rate of completion of the Company's clinical trials is dependent upon, among other factors, the rate of patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the study. Delays in planned patient enrollment may result in increased costs and delays, which could have a material adverse effect on the Company. AS A PHARMACEUTICAL COMPANY, WE ARE SUBJECT TO GOVERNMENTAL REGULATION. Regulation by governmental entities in the United States and other countries will be a significant factor in the production and marketing of any pharmaceutical products that are or may be developed by the Company. It is expected that all of the Company's pharmaceutical products will require regulatory approval by governmental agencies prior to commercialization. In Page 15 16 particular, human pharmaceutical therapeutic products are subject to rigorous preclinical and clinical testing and other approval procedures by the FDA in the United States and similar health authorities in foreign countries. Various federal and, in some cases, state statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of such pharmaceutical products. The process of obtaining these approvals and the subsequent compliance with appropriate federal and foreign statutes and regulations are time-consuming and require the expenditure of substantial resources. Generally, in order to obtain FDA approval for a new therapeutic agent, a company first must conduct preclinical studies in the laboratory and in animal model systems to gain preliminary information on the agent's efficacy and to identify any safety problems. "Preclinical" studies include toxicity, pharmacokinetic and efficacy testing in vitro and in animals and chemical or biological formulation work in preparation for submission of the necessary data to comply with applicable regulations prior to the commencement of human testing. The results of these studies are submitted as a part of an investigational new drug application ("IND"), which the FDA must review before human clinical trials of an investigational drug can start. The Company has filed and will continue to be required to sponsor and file INDs and will be responsible for initiating and overseeing the clinical studies to demonstrate the safety and efficacy that are necessary to obtain FDA approval of its products. Clinical trials are normally done in three phases and generally take two to five years, but may take longer, to complete. "Phase I trials" generally involve administration of a product to a small number of persons to determine safety, tolerance and pharmacokinetic characteristics. "Phase I/II trials" generally involve administration of a product to a small number of persons who have the targeted disease to determine safety, tolerance and pharmacokinetic characteristics and/or to obtain preliminary evidence of efficacy. "Phase II trials" generally involve administration of a product to a limited number of patients with a particular disease to determine dosage, efficacy and safety. "Phase III trials" generally examine the clinical efficacy and safety in an expanded patient population at multiple clinical sites. At least one such trial is required (but usually two are required) for FDA approval to market a drug. After completion of clinical trials of a product, the Company will be required to file a new drug application ("NDA"), if the product is classified as a new drug, or a biologic license application ("BLA"), if the product is classified as a biologic, and receive FDA approval before commercial marketing of the product. The testing and approval processes require substantial time and effort and there can be no assurance that any approval will be granted on a timely basis, if at all. While the Company will endeavor to secure expedited review and approval when possible, NDAs and BLAs can take between one and two years to be reviewed by the FDA, and can take longer if significant questions arise during the review process. While recent legislative and regulatory initiatives have focused on the need to reduce FDA review and approval times, the ultimate impact of such initiatives on the Company's products cannot be certain. If questions arise during the FDA review process, approval can take more than five years. Even if FDA regulatory clearances are obtained, a marketed product is subject to continual review, and later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market, recalls, seizures, injunctions or criminal sanctions. Page 16 17 For marketing outside the United States, the Company will also be subject to foreign regulatory requirements governing human clinical trials, manufacturing and marketing approval for pharmaceutical products. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country. PATENTS AND PROPRIETARY RIGHTS ARE IMPORTANT TO OUR BUSINESS. The Company's success will depend in part on the ability of Connetics and its licensors to obtain patent protection for the Company's products and processes, to preserve its trade secrets, and to operate without infringing the proprietary rights of third parties. The Company owns, controls or has exclusively licensed pending applications and/or issued patents worldwide relating to the technology of all three of its major programs as well as technology in the earlier stages of research. There has been increasing litigation in the biomedical, biotechnology and pharmaceutical industries with respect to the manufacture, use and sale of new therapeutic products that are the subject of conflicting patent rights. The validity and breadth of claims in biomedical/pharmaceutical/biotechnology patents involve complex factual and legal issues for which no consistent policy has emerged, and therefore, are highly uncertain. Moreover, the patent laws of foreign countries differ from those of the U.S. and the degree of protection, if any, afforded by foreign patents may, therefore, be different. In Europe, a third party appeal is pending from an opposition to a patent application concerning relaxin DNA; the original opposition was successfully defended by the Company's licensor. No assurance can be given that any of the Company's or its licensors' patent applications will issue as patents or that any such issued patents will provide a competitive advantage to the Company or will not be successfully challenged or circumvented by its competitors. In addition, others may hold or receive patents or file patent applications that contain claims having a scope that covers products or processes made, used or sold by the Company. In the event that any claims of third-party patents are upheld as valid and enforceable with respect to a product or process made, used or sold by the Company, the Company could be prevented from practicing the subject matter claimed in such patents or could be required to obtain licenses or redesign its products or processes to avoid infringement and could be liable to pay damages. There can be no assurance that such licenses would be available or, if available, would be on commercially reasonable terms, or that the Company would be successful in any attempt to redesign its products or processes to avoid infringement. Connetics has been awarded a U.S. Patent covering its proprietary TCR vaccines technology. The Company is aware that third parties have also obtained patents relating to TCR vaccines technology, including U.S. patents issued to Immune Response Corporation in 1997 and 1998. With regard to such patents as are known to the Company and its patent counsel, the Company believes such patents' claims would be found either invalid or not infringed if asserted against the Company's proposed TCR vaccines. The Company has filed an opposition to a European patent claiming compositions for use in treating multiple sclerosis, covering certain TCR V beta peptides disclosed for treating multiple sclerosis in the Company's own, earlier-filed application; another opposition has been filed against this patent by an independent party. The Company has been advised that a separate opposition has been filed to one of the Company's European patents. Page 17 18 The Company is also aware of other pending third party patent applications which, if issued, might be asserted against the Company's TCR vaccines and products or processes as planned to be made, used or sold by the Company. Even if the Company's patent counsel render advice that the Company's products and processes do not infringe any valid claim under third party patents relating to the TCR vaccines technology, neither they nor the Company can assure that no third party will commence litigation to enforce such patents, or that the Company will not incur substantial expenses or that it will prevail in any patent litigation. A judgment adverse to the Company in any such patent interference, litigation or other proceeding could materially adversely affect the Company's business, financial condition and results of operation, and its expense may be substantial whether or not the Company is successful. Connetics also relies on trade secrets and proprietary know-how. The Company requires each of its employees, consultants and advisors to execute a confidentiality agreement providing that all proprietary information developed or made known to the individual during the course of the relationship will be kept confidential and not used or disclosed to third parties except in specified circumstances. The agreements also provide that all inventions conceived by an employee (or consultant or advisor to the extent appropriate for the services provided) during the course of the relationship shall be the exclusive property of the Company, other than inventions unrelated to the Company and developed entirely on the individual's own time. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for misappropriation of the Company's trade secrets in the event of unauthorized use or disclosure of such information. WE ARE DEPENDENT ON CONTRACT MANUFACTURERS AND SUPPLIERS. The Company currently has no manufacturing facilities for clinical or commercial production of any of its products, nor does the Company intend to develop such capabilities in the near future. The Company's products for research and preclinical testing have been supplied by collaborators and contract manufacturing companies. Relaxin has been manufactured for Connetics under contract with four outside vendors: BASF Bioresearch Corp. for fermentation, Scios, Inc. for purification, Chesapeake Biological Laboratory for filling and Tektagen, Inc. for testing. TCR vaccines are manufactured for the Company by American Peptide Company and Multiple Peptide Systems. The Company is currently in negotiations with Bender & Co. GmbH to manufacture Relaxin for clinical and commercial uses. Ridaura is manufactured by SmithKline (in final finished package form) under an agreement with an initial term through December 2001. Luxiq and OLUX are currently manufactured for Connetics by CCL Pharmaceuticals. Interferon gamma is manufactured by Genentech and Parke-Davis. If the Company is unable to contract for manufacturing capabilities on acceptable terms, the Company's ability to conduct preclinical and human clinical testing will be adversely affected, resulting in the delay of submission of products for regulatory approval and initiation of new development programs, which in turn could impair materially the Company's competitive position and the possibility of the Company achieving profitability. In addition, some materials used in the Company's products may be available only from sole suppliers. Although neither the Company nor its contract manufacturers has experienced difficulty acquiring materials for the manufacture of its products for clinical trials, no assurance can be given that interruptions in Page 18 19 supplies will not occur in the future, which could have a material adverse effect on the Company's ability to manufacture its products. There can also be no assurance that the Company will be able to manufacture any of its products on a commercial scale or at a competitive cost or in sufficient quantities. There is no assurance that additional suppliers will be engaged by the Company or that the current manufacturers of relaxin can supply sufficient clinical quantities. Failure to obtain sufficient clinical or commercial quantities of relaxin or other products at acceptable terms would have a material adverse impact on the Company's attempts to complete its clinical trials, and obtain approval for and commercialize its products. WE ARE IN A HIGHLY COMPETITIVE INDUSTRY AND ARE SUBJECT TO RISK OF TECHNOLOGICAL CHANGE. Other products and therapies currently exist on the market or are under development that could compete directly with some of the products that the Company is marketing, or seeking to develop and market. There can be no assurance that the Company's products, even if successfully tested and developed, will be adopted by physicians over such other products, or that the Company's products will offer an economically feasible alternative to existing modes of therapy where they exist. In addition, a number of companies have received FDA approval in 1998 for new products and therapies to address diseases involving connective tissue, particularly in the field of rheumatoid arthritis, and the number of the Company's competitors in these markets could increase. It is uncertain what impact, if any, the introduction of new products will have on the Company's existing or future product revenues. The Company intends to compete on the basis of the effectiveness, quality and exclusivity of its products, combined with the effectiveness of its marketing and sales efforts. There can be no assurance that other products and therapies will not be developed that will either render the Company's proposed products obsolete or will have advantages outweighing those of the products and therapies that the Company is seeking to develop. With regard to Ridaura, there are numerous products on the market, and under development, for the treatment of rheumatoid arthritis. There can be no assurance that Ridaura will continue to be utilized by physicians over other rheumatoid arthritis products, or that Ridaura will continue to offer a cost-effective alternative to competing therapies. In addition, although the Company believes that there will be a continued role for products such as Ridaura, the market for rheumatoid arthritis will likely change based upon new product introductions, which could have a material adverse effect on the Company's sales of Ridaura. Many of the Company's existing or potential competitors, particularly large pharmaceutical companies, have substantially greater financial, technical and human resources than the Company. In addition, many of these competitors have more collective experience than the Company in undertaking preclinical testing and human clinical trials of new pharmaceutical products and obtaining regulatory approvals for therapeutic products. Accordingly, the Company's competitors may succeed in obtaining FDA approval for products more rapidly than the Company. WE ARE SUBJECT TO THE RISK OF PRODUCT LIABILITY CLAIMS. Page 19 20 The Company faces an inherent business risk of exposure to product liability claims in the event that the use of its technology or potential products is alleged to have resulted in adverse effects. Such claims, even if successfully defended by the Company, could injure the Company's reputation. While the Company has taken, and intends to continue to take, what it believes are appropriate precautions to minimize exposure to product liability claims, there can be no assurance that it will avoid liability. The Company believes that it possesses product liability and general liability and certain other types of insurance customarily obtained by business organizations of its type. The Company intends to maintain insurance against product liability risks associated with the testing, manufacturing and marketing of its products. However, there can be no assurance that it will be able to obtain such insurance in the future, or that if obtained, such insurance will be sufficient. Consequently, a product liability claim or other claims with respect to uninsured liabilities or in excess of insured liabilities could have a material adverse effect on the business or financial condition of the Company. WE ARE DEPENDENT ON OUR KEY PERSONNEL, AND WILL NEED TO HIRE ADDITIONAL KEY PERSONNEL IN THE FUTURE. The Company is dependent on the principal members of its scientific and management staffs (including Thomas G. Wiggans, its President and Chief Executive Officer), the loss of whose services might impede the achievement of development objectives. The Company does not maintain "key person" insurance on any of these individuals. In addition, the Company's potentially rapid growth and expansion into areas and activities requiring additional expertise, such as clinical trials, governmental approvals, manufacturing, sales and marketing, will increase burdens on the Company's management, operational and financial resources. These demands are expected to require an increase in management and scientific personnel and the development of additional expertise by existing management personnel. Recruiting and retaining management, operational personnel and qualified scientific personnel to perform research and development work in the future will be critical to the Company's success. Although the Company believes it will continue to be successful in attracting and retaining skilled and experienced management and operational and scientific personnel, there can be no assurance that the Company will be able to attract and retain such personnel on acceptable terms given the competition for such personnel among numerous pharmaceutical and biotechnology companies, universities and other institutions. WE ARE SUBJECT TO RISKS ASSOCIATED WITH HEALTH CARE COST CONTAINMENT INITIATIVES, INCLUDING ANY SUCH EFFORTS THAT WOULD AFFECT THE PRICING OF PHARMACEUTICAL PRODUCTS. The commercial success of the Company's products under development will be substantially dependent upon the availability of government or private third-party reimbursement for the use of such products. There can be no assurance that Medicare, Medicaid, health maintenance organizations and other third-party payers will authorize or otherwise budget such reimbursement. Such governmental and third party payers are increasingly challenging the prices charged for medical products and services. If the Company succeeds in bringing one or more of its development products to market, there can be no assurance that such products will be viewed as cost-effective or that reimbursement will be available to consumers or will be sufficient to allow the Company's products to be marketed on a competitive basis. Furthermore, Page 20 21 federal and state regulations govern or influence the reimbursement to health care providers of fees and capital equipment costs in connection with medical treatment of certain patients. In response to concerns about the rising costs of advanced medical technologies, the current administration of the federal government has in the past publicly stated its desire to reform health care, including the possibility of price controls and revised reimbursement policies; while the administration is no longer pursuing major initiatives, there can be no assurance that any future actions taken by the administration with regard to health care reform will not have a material adverse effect on the Company. If any actions are taken by the administration, such actions could adversely affect the prospects for future sales of the Company's products. Further, to the extent that these or other proposals or reforms have a material adverse effect on the Company's ability to secure funding for its development or on the business, financial condition and profitability of other companies that are prospective collaborators for certain of the Company's product candidates, the Company's ability to develop or commercialize its product candidates may be adversely affected. Given recent government initiatives directed at lowering the total cost of health care throughout the United States, it is likely that the U.S. Congress and state legislatures will continue to focus on health care reform and the cost of prescription pharmaceuticals, as well as on the reform of the Medicare and Medicaid systems. The Company cannot predict the likelihood of passage of federal and state legislation related to health care reform or lowering pharmaceutical costs. In certain foreign markets pricing of prescription pharmaceuticals is already subject to government control. Continued significant changes in the U.S. or foreign health care systems could have a material adverse effect on the Company's business. WE USE HAZARDOUS MATERIALS IN OUR BUSINESS AND ARE SUBJECT TO ENVIRONMENTAL CONTROLS AND REGULATIONS. The Company's research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive materials. The Company is subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of such materials and certain waste products. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state, federal, and local laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any liability could exceed the resources of the Company. There can be no assurance that the Company will not be required to incur significant costs to comply with environmental laws and regulations as its research activities are increased or that the operations, business and future profitability of the Company will not be adversely affected by current or future environmental laws and regulations. WE HAVE CERTAIN ANTI-TAKEOVER PROVISIONS IN OUR CORPORATE CHARTER DOCUMENTS. The Company's Board of Directors has the authority to issue up to 5,000,000 shares of undesignated Preferred Stock and to determine the rights, preferences, privileges and restrictions of such shares without further vote or action by the Company's stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely effected by, the rights of the Page 21 22 holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock could have the effect of making it more difficult for third parties to acquire a majority of the outstanding voting stock of the Company. In 1997, the Company's Board of Directors adopted a stockholder rights plan, which entitles existing stockholders of the Company to certain rights (including the right to purchase shares of Preferred Stock) in the event of an acquisition of 15% or more of the Company's outstanding common stock, or an unsolicited tender offer for such shares. The existence of the rights plan could delay, prevent, or make more difficult a merger or tender offer or proxy contest involving the Company. In addition, certain provisions of the Company's charter documents, including a provision eliminating the ability of stockholders to take actions by written consent, and of Delaware law could delay or make difficult a merger, tender offer or proxy contest involving the Company. Further, the Company's stock option and purchase plans generally provide for the assumption of such plans or substitution of an equivalent option of a successor corporation or, alternatively, at the discretion of the Board of Directors, exercise of some or all of the option stock, including non-vested shares, or acceleration of vesting of shares issued pursuant to stock grants, upon a change of control or similar event. OUR STOCK PRICE MAY BE VOLATILE. WE HAVE NOT PAID DIVIDENDS TO DATE AND DO NOT INTEND TO DO SO IN THE FUTURE. Prior to February 1996 there was no public market for the Common Stock of the Company. There can be no assurance that there will be an active trading market for the Common Stock of the Company or that the market price of the Common Stock will not decline below its present market price. The market prices for securities of biotechnology companies have been and are likely to continue to be highly volatile. Announcements regarding the results of regulatory approval filings, clinical studies or other testing, technological innovations or new commercial products by the Company or its competitors, government regulations, developments concerning proprietary rights or public concern as to safety of technology have historically had, and are expected to continue to have, a significant impact on the market prices of the stocks of biotechnology companies. For instance, in August 1997, the Company's trading price dropped approximately 46.7% the day the Company announced negative results from its Phase III clinical trial of interferon gamma for the treatment of atopic dermatitis. The trading price of the Common Stock could also be subject to significant fluctuations in response to variations in operating results. In addition, the Company has never paid cash dividends on its capital stock and does not anticipate paying cash dividends in the foreseeable future, but instead intends to retain future earnings for reinvestment in its business. The Company's credit agreement requires the approval of the Company's bank to declare or pay cash dividends. USE OF PROCEEDS The Company will not receive any proceeds from the sale of the Shares by the Selling Stockholders in the offering. Page 22 23 INDEMNIFICATION OF OFFICERS AND DIRECTORS Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's Board of Directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). Article IX of the Company's Amended and Restated Certificate of Incorporation and Article VII, Section 6 of the Company's Bylaws provide for indemnification of its directors, officers, employees and other agents to the maximum extent permitted by law. In addition, the Company has entered into Indemnification Agreements with its officers and directors and maintains director and officer liability insurance. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company, the Company has been advised that in the opinion of the Commission, such indemnification is against public policy, as stated by the Commission, and is, therefore, unenforceable. ISSUANCE OF COMMON STOCK TO SELLING STOCKHOLDERS On November 20, 1998, the Company entered into an agreement with a group of investors (collectively the "Investors"), to sell an aggregate of 3,167,500 shares of the Company's Common Stock at a price of $4.00 per share, for an aggregate purchase price of approximately $12,670,000. These shares were issued to the Investors on that date. In May 1998, the Company issued 380,048 shares to Genentech, Inc. under the Company's obligation to issue equity to Genentech, Inc. in connection with the Company's acquisition of rights to interferon gamma. On November 5, 1998, the Compensation Committee of the Company's Board of Directors authorized the issuance of 25,000 shares of restricted stock to Kirk Raab, the Chairman of the Board of Directors, at a price of $0.10 per share for an aggregate purchase price of $2,500. SELLING STOCKHOLDERS The following table sets forth certain information as of November 20, 1998 with respect to each Selling Stockholder:
Shares Beneficially Owned After Name of Selling Stockholder Shares Offered Offering (1)(2) Hereby (1) ------------------------------- Number Percent Domain Partners (3) 1,500,000 1,287,006 5.9% Alta Partners (4) 250,000 2,287,163 11.2% New Enterprise Associates (5) 1,250,000 -- -- Alex Barkas and Lynda Wijcik (6) 50,000 227,586 Thomas Kiley (7) 10,000 99,982 Merlin BioMed L.P. (8) 45,000 5,000 Jalaa Equities 25,000 60,000 Snowdon Limited Partnership 25,000 367,455 John Kane (9) 12,500 12,500 All November 1998 Investors (10) 3,167,500 4,346,692 Genentech, Inc. 380,048 -- --
Page 23 24 Kirk Raab(11) 25,000 131,569 Total 3,572,548 4,478,261
* Less than 1% (1) Beneficial ownership is determined in accordance with the rules and regulations of the Commission and generally includes voting or investment power with respect to securities. Information with respect to beneficial ownership is based on information as of November 20, 1998 and assumes that there is outstanding an aggregate of 20,477,617 shares of Common Stock (not including treasury shares) and 293,420 shares issuable upon the exercise of warrants, and options to purchase the Company's Common Stock which are exercisable within 60 days of November 20, 1998. No options have been issued to the Selling Stockholders named in this Prospectus other than Messrs. Barkas, Kiley, Kane, and Raab. Except as indicated otherwise in the footnotes below, and subject to community property laws where applicable, the Company believes based on information furnished by the Selling Stockholders that the persons named in the table above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. (2) Assumes the sale of all Shares offered by this Prospectus and no other purchases or sales of Connetics Common Stock. See "Plan of Distribution." If shares offered by this prospectus are not sold, actual share ownership will be higher than this table reflects. (3) Shares offered hereby consist of 241,640 shares offered by Domain Partners III L.P., 8,360 shares offered by DP III Associates L.P., 1,220,247 shares offered by Domain Partners IV, L.P. and 29,253 shares offered by DP IV Associates L.P. Shares beneficially owned after offering include 66,107 warrants and 20,147 options to purchase shares of Common Stock which are currently exercisable or will become exercisable within 60 days of November 20, 1998 by Mr. Brian Dovey, a Director of the Company, who is a partner of Domain Associates. (4) Shares offered hereby consist of 155,397 shares offered by Alta BioPharma Partners L.P., 5,857 shares offered by Alta Embarcadero BioPharma, LLC, and 88,746 shares offered by Connetics Partners (Alta Bio), LLC. (5) Shares offered hereby consist of 1,233,750 shares offered by New Enterprise Associates VIII, Limited Partnership, 15,000 shares offered by NEA Presidents Fund, L.P. and 1,250 shares offered by NEA Ventures 1998, Limited Partnership. (6) Includes 11,855 warrants and 24,362 options to purchase shares of Common Stock which are currently exercisable or will become exercisable within 60 days of November 20, 1998 by Mr. Barkas. (7) Includes 37,500 options to purchase shares of Common Stock which are currently exercisable or will become exercisable within 60 days of November 20, 1998 by Mr. Kiley. (8) Does not include 265,000 shares held in various funds managed by Merlin BioMed L.P. (9) Includes 7,500 options to purchase shares of Common Stock which are currently exercisable or will become exercisable within 60 days of November 20, 1998 by Mr. Kane. (10) Shares beneficially owned after offering includes 77,962 warrants and 89,509 options to purchase shares of Common Stock which are currently exercisable or will become exercisable within 60 days after November 20, 1998 by all of the Selling Stockholders. (11) Includes 125,949 options to purchase shares of Common Stock which are currently exercisable or will become exercisable within 60 days of November 20, 1998 by Mr. Raab. Page 24 25 PLAN OF DISTRIBUTION The Selling Stockholders may sell the Shares in whole or in part, from time to time on the over-the-counter market at prices and on terms prevailing at the time of any such sale. Any such sale may be made in broker's transactions through broker-dealers acting as agents, in transactions directly with market makers or in privately negotiated transactions where no broker or other third party (other than the purchaser) is involved. The Selling Stockholders will pay selling commissions or brokerage fees, if any, with respect to the sale of the Shares in amounts customary for the type of transaction effected. The Selling Stockholders will also pay all applicable transfer taxes and all fees and disbursements of counsel for the Selling Stockholders incurred in connection with the sale of shares. The Selling Stockholders have advised the Company that during such time as the Selling Stockholders may be engaged in the attempt to sell Shares registered hereunder, that they will: (i) not engage in any stabilization activity in connection with any of the Company's securities; (ii) cause to be furnished to each person to whom Shares included in this Prospectus may be offered, and to each broker-dealer, if any, through whom Shares are offered, such copies of this Prospectus, as supplemented or amended, as may be required by such person; and (iii) not bid for or purchase any of the Company's securities or any rights to acquire the Company's securities, or attempt to induce any person to purchase any of the Company's securities or rights to acquire the Company's securities other than as permitted under the Exchange Act. The Selling Stockholders, and any other persons who participate in the sale of the Shares, may be deemed to be "Underwriters" as defined in the Securities Act. Any commissions paid or any discounts or concessions allowed to any such persons, and any profits received on resale of the Shares, may be deemed to be underwriting discounts and commissions under the Securities Act. With regard to the Shares, the Company has agreed to maintain the effectiveness of this Registration Statement until two years after the effective date of this Registration Statement; provided however that the Company has agreed to extend the effectiveness of the Registration Statement for an additional one year period following the expiration of the initial two year period, if requested in a writing signed by a majority of the Selling Stockholders; provided Page 25 26 further, however, that if counsel to the Company provides an opinion to the requesting holders, based on factual representations provided by the requesting holders or information filed with the Commission that such holders are not, at the time of such request, "affiliates" of the Company, within the meaning of Rule 144 of the Securities Act, then the Company shall not be obligated to extend the effectiveness of the Registration Statement. No sales may be made pursuant to this Registration Statement and Prospectus after such dates unless the Company amends or supplements this Registration Statement and Prospectus to indicate that it has agreed to extend such period of effectiveness. The Company has agreed to indemnify the Selling Stockholders against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS Certain legal matters with respect to the legality of the issuance of the Common Stock offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California 94304. EXPERTS Ernst & Young LLP, independent auditors, have audited our financial statements included in our Annual Report (Form 10-K) for the year ended December 31, 1997, as set forth in their report, which is incorporated in this prospectus by reference. Our financial statements are incorporated herein by reference in reliance on their report, given on their authority as experts in accounting and auditing. ADDITIONAL INFORMATION This Prospectus constitutes a part of a Registration Statement on Form S-3 (referred to, together with all amendments and exhibits, as the "Registration Statement") filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the shares of Common Stock offered hereby, reference is hereby made to the Registration Statement. Statements contained herein concerning the provisions of any document are not necessarily complete, and each such statement is qualified in its entirety by reference to the copy of such document filed with the Commission. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Page 26 27 The following table sets forth the costs and expenses payable by the Registrant in connection with the sale and distribution of the Common Stock being registered. Selling commissions and brokerage fees and any applicable transfer taxes and fees and disbursements of counsel for the Selling Stockholders are payable by the Selling Stockholders. All amounts are estimates except the registration fee.
Amount to be Paid Registration Fee 4,063 Legal Fees and Expenses 10,000 Accounting Fees and Expenses 4,000 Miscellaneous 1,937 ------- Total $20,000
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's Board of Directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933. Article IX of the Registrant's Amended and Restated Certificate of Incorporation and Article VII, Section 6 of the Registrant's Bylaws provide for indemnification of its directors, officers, employees and other agents to the maximum extent permitted by law. In addition, the Registrant has entered into Indemnification Agreements with its officers and directors and maintains director and officer liability insurance. ITEM 16. EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - -------------- ---------------------- 10.1 Common Stock Purchase Agreement dated April 10, 1998 by and among the Registrant and certain investors 10.2 Registration Rights Agreement, dated April 10, 1998 by and among the Registrant and certain investors 10.4 Stock Purchase Agreement dated May 5, 1998 between the Registrant and Genentech, Inc. 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
Page 27 28 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of Counsel (included in Exhibit 5.1) 24.1 Power of Attorney (see page II-30)
* Previously filed. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) That, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referred to in Item 15 above or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted against the Registrant by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by Page 28 29 controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. Page 29 30 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Palo Alto, State of California, on the 14th day of December 1998. CONNETICS CORPORATION By: /s/ JOHN L. HIGGINS John L. Higgins Vice President of Finance and Administration and Chief Financial Officer POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints, jointly and severally, Thomas G. Wiggans and John L. Higgins, and each of them acting individually, as his attorney-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments), and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney to any and all amendments to said Registration Statement. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - --------- ----- ---- THOMAS G. WIGGANS - ---------------------------- President, Chief Executive Officer and Dec. 14, 1998 /s/ THOMAS G. WIGGANS Director (Principal Executive Officer) JOHN L. HIGGINS - ---------------------------- Vice President of Finance and Dec. 14, 1998 /s/ JOHN L. HIGGINS Administration and Chief Financial Officer (Principal Financial and Accounting Officer)
Page 30 31 G. KIRK RAAB - ---------------------------- Chairman of the Board of Directors Dec. 14, 1998 /s/ G. KIRK RAAB ALEXANDER E. BARKAS - ---------------------------- Director Dec. 14, 1998 /s/ ALEXANDER E. BARKAS EUGENE A. BAUER - ---------------------------- Director Dec. 15, 1998 /s/ EUGENE A. BAUER BRIAN H. DOVEY - ---------------------------- Director Dec. 15, 1998 /s/ BRIAN H. DOVEY JOHN C. KANE - ---------------------------- Director Dec. 15, 1998 /s/ JOHN C. KANE THOMAS D. KILEY - ---------------------------- Director Dec. 14, 1998 /s/ THOMAS D. KILEY - ---------------------------- Director Dec. __, 1998 /s/ KENNETH B. PLUMLEE JOSEPH J. RUVANE, JR. - ---------------------------- Director Dec. 15, 1998 /s/ JOSEPH J. RUVANE, JR.
Page 31 32 CONNETICS CORPORATION INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - -------------- ---------------------- 10.1 Common Stock Purchase Agreement dated April 10, 1998 by and among the Registrant and certain investors 10.2 Registration Rights Agreement, dated April 10, 1998 by and among the Registrant and certain investors 10.4 Stock Issuance Agreement dated May 5, 1998 between the Registrant and Genentech, Inc. 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of Counsel (included in Exhibit 5.1) 24.1 Power of Attorney (see page II-30)
EX-5.1 2 OPINION OF WILSON SONSINI GOODRICH & ROSATI 1 EXHIBIT 5.1 OPINION OF COUNSEL December 16, 1998 Connetics Corporation 3400 West Bayshore Road Palo Alto, California 94303 Re: Connetics Corporation (the "Company") Registration Statement on Form S-3 Ladies and Gentlemen: We have examined the Registration Statement on Form S-3 to be filed with the Securities and Exchange Commission (the "Registration Statement"), in connection with the registration under the Securities Act of 1933, as amended, of 3,572,548 shares of the Company's Common Stock. As your counsel, we have examined the proceedings taken in connection with the sale and issuance of the above-referenced securities. It is our opinion that the above-referenced securities, when issued and sold in the manner referred to in the Registration Statement, will be legally and validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement, and further consent to the use of our name wherever appearing in the Registration Statement, including the Prospectus constituting a part thereof, and any amendment thereto. Very truly yours, WILSON, SONSINI, GOODRICH & ROSATI Professional Corporation /s/ WILSON SONSINI GOODRICH & ROSATI EX-10.1 3 COMMON STOCK PURCHASE AGREEMENT DATED 04/10/1998 1 EXHIBIT 10.1 CONNETICS CORPORATION COMMON STOCK PURCHASE AGREEMENT NOVEMBER 20, 1998 This Common Stock Purchase Agreement (the "Agreement") is entered into as of this 20th day of November, 1998, among Connetics Corporation, a Delaware corporation (the "Company") and each of the persons listed on EXHIBIT A to this Agreement (each a "Purchaser" and together the "Purchasers"). 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 the Purchasers, and the Purchasers will purchase from the Company, an aggregate of, 10,000 shares of Common Stock, par value $0.001 per share, of the Company (the "Common Stock"), at a price per share of $4.00 for an aggregate purchase price of $40,000. The number of shares of Common Stock to be purchased and the purchase price to be paid by each Purchaser are outlined on EXHIBIT A, which is incorporated herein by this reference. 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 November 20, 1998 or at such other time and place upon which the Company and the Purchasers shall mutually agree (the date of the Closing is hereinafter referred to as the "Closing Date"). 1.3 Delivery. At the Closing, the Company will deliver to each Purchaser a certificate or certificates representing the shares of Common Stock purchased by such Purchaser, against payment of the purchase price therefor, by wire transfer or certified or cashier's check drawn on a United States ("U.S.") bank. 1.4 Legend. The certificate or certificates 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 2 SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR (C) FULL COMPLIANCE WITH THE PROVISIONS OF RULE 144 UNDER THE ACT." 1.5 Removal of Legends. Any legend endorsed on a certificate pursuant to SECTION 1.4 hereof 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 Purchasers 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 and as proposed to be conducted. The Company is qualified to do business as a foreign corporation in each jurisdiction in which the ownership of its property or the nature of its business requires such qualification, except where failure to so qualify would not have a materially adverse effect on the Company. 2.2 Authorization. The Company has all corporate right, power and authority to enter into this Agreement and the Registration Rights Agreement substantially in the form attached hereto as EXHIBIT B (the "Registration Rights Agreement") and to consummate the transactions contemplated hereby and thereby. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of this Agreement and the Registration Rights Agreement by the Company, and the authorization, sale, issuance and delivery of the Common Stock and the performance of the Company's obligations hereunder and under the Registration Rights Agreement has been taken. This Agreement and the Registration Rights Agreement have been duly executed and delivered by the Company and constitute legal, valid and binding obligations of the Company enforceable in accordance with their respective 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 as they may apply to Section 1.6 of the Registration Rights Agreement. Upon issuance and delivery pursuant to this Agreement, all of the Common Stock will be duly and validly issued, fully paid and nonassessable and free and clear of any liens and encumbrances. 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. The issuance, sale and delivery of the Common Stock are not subject to 3 preemptive or any similar rights of the Stockholders of the Company or any liens or encumbrances arising through the Company. Based in part upon the representations of the Purchasers 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 Capitalization. The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, $0.001 par value, of which at September 30, 1998, 17,251,289 shares were issued and outstanding, and 5,000,000 shares of Preferred Stock, $0.001 par value, of which at September 30, 1998, zero shares were issued and outstanding. The Company's Board of Directors has authorized the creation of 90,000 shares of Series B Preferred Stock for potential issuance under the Company's stockholder rights plan. Since September 30, 1998 no shares of the Company's Common or Preferred Stock have been issued, except pursuant to the exercise of options or warrants outstanding as of September 30, 1998. All such issued and outstanding shares have been duly authorized and validly issued and are fully paid and nonassessable. In addition to the foregoing, the Company has reserved and outstanding the following warrants, rights, options and convertible securities: (i) warrants for the purchase of 18,395 shares of Common Stock at an exercise price of $4.89 per share, which warrants expire in February 2001; (ii) warrants for the purchase of 22,728 shares of Common Stock at an exercise price of $11.00 per share, which warrants expire in December 2000; (iii) warrants for the purchase of 73,071 shares of Common Stock at an exercise price of $5.78, which warrants expire in December 2002; (iv) warrants for the purchase of 20,000 shares of Common Stock at an exercise price of $7.43 per share, which warrants expire in December, 2001; (v) warrants for the purchase of 250,000 shares of Common Stock at an exercise price of $8.25 per share, which warrants expire in January 2002; (vi) warrants for the purchase of 905,000 shares of Common Stock at an exercise price of $9.08 per share, which warrants expire in May, 2001; (vii) warrants for the purchase of 6,000 shares of Common Stock at an exercise price of $6.00 per share, which warrants expire in January, 2003; (viii) 2,600,000 shares reserved for issuance pursuant to the Company's 1994 Stock Plan, of which, at September 30, 1998, options (net of repurchases) to purchase 373,015 shares had been exercised, options to purchase 1,894,430 shares were outstanding and 332,555 shares remained available for future grant; (ix) 500,000 shares reserved for issuance pursuant to the Company's 1995 Employee Stock Purchase Plan, of which, at September 30, 1998, 138,132 shares had been issued; (x) 250,000 shares reserved for issuance under the Company's 1995 Directors' Stock Option Plan, of which, at September 30, 1998, 165,000 options had been granted; In addition, the Company has an equity line that is potentially available for a three-year period beginning June 26, 1998. If, during the period from June 1998 through June 2001, the Stock meets certain volume restrictions and trades above $10.00, then up to $500,000 would be drawn down from the equity line approximately every three months. The Company may also be obligated to issue additional shares to Genentech, Inc. before December 31, 1998, as part of the 4 consideration paid for the Company's acquisition of rights to gamma interferon in 1998. Except as described in this Section 2.4, there are no other options, warrants, conversion privileges or other contractual rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of the Company's capital stock or other securities. All of the issued and outstanding securities of the Company have been issued in compliance with all applicable federal and state securities laws. 2.5 No Conflict. The execution and delivery of this Agreement and the Registration Rights Agreement do not, and the consummation of the transactions contemplated hereby and thereby 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 mortgage, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company, its properties or assets, which conflict, violation, default or right would have a material adverse effect on the business, properties, prospects or financial condition of the Company. 2.6 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 each 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). 2.7 Changes. Since November 13, 1998 (the date on which the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998 was filed with the SEC), there has not been (a) any incurrence by the Company of any material liability, absolute or contingent, or (b) any event or condition of any character that has materially and adversely affected or might materially and adversely affect the business, properties, prospects or financial condition of the Company (as such business is presently conducted and as it is proposed to be conducted). There is no material liability or contingency of the Company that is not disclosed in the SEC Documents. 5 2.8 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 Registration Rights Agreement, or the consummation of any other transaction contemplated hereby and thereby, 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. 2.9 Litigation. There is no pending or, to the best of the Company's knowledge, threatened lawsuit, administrative proceeding, arbitration, labor dispute or governmental investigation ("Litigation") to which the Company is a party or by which any material portion of its assets, taken as a whole, may be bound, nor is the Company aware of any basis therefor, which Litigation, if adversely determined, would have a material adverse effect on the business, properties, prospects or financial condition of the Company. 2.10 Intellectual Property. To its knowledge, and except as disclosed in the SEC Documents, the Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, tradenames, copyrights, trade secrets, licenses, information and proprietary rights and processes necessary for its business as now conducted and as proposed to be conducted, without infringement of any rights of a third party. 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, tradenames, copyrights, trade secrets or other proprietary rights or processes of any other person or entity, which violation would have a material adverse effect on the business, properties, prospects or financial condition of the Company. Except as disclosed in the SEC Documents, the Company has not granted (nor has the Company licensed from a third party) any material rights to or licenses to its patents, trademarks, service marks, tradenames, copyrights, trade secrets or other proprietary rights or processes. 2.11 Registration Rights. Except as provided in the Registration Rights Agreement and as disclosed in the SEC Documents, the Company has not granted or agreed to grant any rights to register its securities under the Securities Act, including piggy-back rights, to any person or entity. 2.12 No Material Default. The Company is not in violation of or default under any provision of (a) its Certificate of Incorporation or Bylaws or (b) any mortgage, indenture, lease or other agreement or instrument, permit, concession, franchise or license to which it is a party or by which it is bound or (c) any federal or state judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company, except with respect to clauses (b) and (c) above, such violations or defaults as would not have a material adverse effect on the business, properties, prospects or financial condition of the Company. 2.13 Disclosure. No representation or warranty of the Company contained in this Agreement or the exhibits attached to this Agreement (when read together and taken as a whole), 6 contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein in light of the circumstances under which they were made not misleading. 2.14 Solvency; No Default. As of this date the Company has sufficient funds and cash flow to pay its debts and other liabilities as they become due, and the Company is not in default with respect to any material debt or liability. 2.15 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 PURCHASERS Each Purchaser hereby represents and warrants to the Company as follows: 3.1 Investment. Purchaser is acquiring the Common Stock for investment for its 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 by such Purchaser from the 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 such Purchaser's investment intent and the accuracy of such Purchaser's representations as expressed herein. 3.2 Accredited Investor. Each Purchaser is an "accredited investor" as defined by Rule 501(a) under the Securities Act of 1933, as amended (the "Securities Act"). The SEC documents have been made available to each Purchaser, and each Purchaser has received all the information it has requested regarding the Company. Each Purchaser has such business and financial experience as is required to give it the capacity to protect its own interests in connection with the purchase of the Common Stock. 3.3 Authority. This Agreement and the Registration Rights Agreement have been duly executed and delivered by each Purchaser and constitute legal, valid and binding obligations of the Purchasers, enforceable in accordance with their respective 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 as they may apply to Section 1.6 of the Registration Rights Agreement. The execution and delivery of this Agreement and the Registration Rights Agreement do not, and the consummation of the transactions contemplated hereby and thereby 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 Purchasers. 3.4 Government Consents, Etc. No consent, approval or authorization of or designation, declaration or filing with any governmental authority on the part of the Purchasers is 7 required in connection with the valid execution and delivery of this Agreement, or the offer, sale or issuance of the Common Stock, or the consummation of any other transaction contemplated hereby. 3.5 Investigation. Each Purchaser has had a reasonable opportunity to discuss the Company's business, management and financial affairs with the Company's management. SECTION 4 CONDITIONS TO OBLIGATIONS OF THE PURCHASERS The obligations of each Purchaser 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 Covenants. All covenants, agreements and conditions contained in this Agreement to be performed by the Company on or prior to the Closing Date shall have been performed or complied with in all material respects. 4.3 No Order Pending. There shall not then be in effect any order enjoining or restraining the transactions contemplated by this Agreement. 4.4 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). 4.5 Compliance Certificate. The Company shall have delivered to the Purchasers a certificate substantially in the form attached as EXHIBIT C to this Agreement, executed by a duly authorized officer, dated the Closing Date, and certifying to the fulfillment of the conditions specified in SECTIONS 4.1 and 4.2. 4.6 Registration Rights Agreement. On or before the Closing, the Company and the Purchasers shall have executed and delivered a counterpart of the Registration Rights Agreement attached as EXHIBIT B. 4.7 Legal Opinion. The Purchasers shall have received from Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the Company, an opinion addressed to the Purchasers, dated the Closing Date, in substantially the form attached as EXHIBIT D to this Agreement. 8 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(s) in SECTION 3 hereof shall be true and correct in all material 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 Performance. All covenants, agreements and conditions contained in this Agreement to be performed by the Purchasers on or prior to the Closing Date shall have been performed or complied with in all material respects. 5.3 No Order Pending. There shall not then be in effect any order enjoining or restraining the transactions contemplated by this Agreement. 5.4 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 the Purchasers 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, the Registration Rights 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 thereof and supersede all prior agreements and understandings among the parties relating to the subject matter hereof. Neither this Agreement nor any term hereof may be amended, waived, 9 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. (a) Except as disclosed to the Purchasers, the Company has not engaged, consented to or authorized any broker, finder or intermediary to act on its behalf, directly or indirectly, as a broker, finder or intermediary in connection with the transactions contemplated by this Agreement. The Company agrees to indemnify and hold harmless the Purchasers from and against all fees, commissions or other payments owing to any party acting on behalf of the Company hereunder. (b) No Purchaser has engaged, consented to or authorized any broker, finder or intermediary to act on its behalf, directly or indirectly, as a broker, finder or intermediary in connection with the transactions contemplated by this Agreement. Each Purchaser hereby agrees to indemnify and hold harmless the Company from and against all fees, commissions or other payments owing to any party acting on behalf of such Purchaser hereunder. 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 Costs and Expenses. Irrespective of whether the Closing is effected, the Company shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. 6.9 No Third Party Rights. Nothing in this Agreement shall create or be deemed to create any rights in any person or entity not a party to this Agreement. 6.10 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. 10 6.11 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: 3400 West Bayshore Road Palo Alto, California 94303 By: ____________________________ Facsimile: (650) 843-2899 Thomas G. Wiggans President and Chief Executive Officer PURCHASER(S) By: ____________________________ Address: 11 EXHIBIT A LIST OF PURCHASERS
Name Number of Shares Purchase Price - ---- ---------------- -------------- 1) Alexander E. Barkas 50,000 $ 200,000.00 2) John C. Kane 12,500 $ 50,000.00 3) Kiley Family Partnership 10,000 $ 40,000.00 4) Alta BioPharma Partners, L.P. 155,397 $ 621,588.00 5) Alta Embarcadero BioPharma, LLC 5,857 $ 23,428.00 6) Connetics Partners (Alta Bio), LLC 88,746 $ 354,984.00 7) Domain Partners III, L.P. 241,640 $ 966,560.00 8) DP III Associates, L.P. 8,360 $ 33,440.00 9) Domain Partners IV, L.P. 1,220,747 $ 4,882,988.00 10) DP IV Associates, L.P. 29,253 $ 117,012.00 11) Jalaa Equities 25,000 $ 100,000.00 12) New Enterprise Associates VIII, Limited Partnership 1,233,750 $ 4,935,000.00 13) NEA Presidents Fund, L.P. 15,000 $ 60,000.00 14) NEA Ventures 1998, Limited Partnership 1,250 $ 5,000.00 15) Merlin BioMed Asset Management 45,000 $ 180,000.00 16) Snowdon L.P. 25,000 $ 100,000.00 Total shares issued: 3,167,500 $12,670,000.00
12 EXHIBIT B REGISTRATION RIGHTS AGREEMENT 13 EXHIBIT C CONNETICS CORPORATION COMPLIANCE CERTIFICATE The undersigned, Thomas G. Wiggans, hereby certifies as follows: 1. He is the duly elected President and Chief Executive Officer of Connetics Corporation, a Delaware corporation (the "Company"). 2. The representations and warranties of the Company set forth in Section 2 of the Common Stock Purchase Agreement (the "Agreement") dated November 20, 1998 are true and correct in all material respects as though made on and as of the date of this Certificate. 3. The Company has performed and complied with all covenants, agreements, obligations and conditions contained in the Agreement to be performed by the Company on or prior to the Closing Date. The undersigned has executed this Certificate this 3rd day of December 1998. ------------------------------ Thomas G. Wiggans, President and Chief Executive Officer 14 EXHIBIT D OPINION OF WILSON SONSINI GOODRICH & ROSATI EX-10.2 4 REGISTRATION RIGHTS AGREEMENT DATED 04/10/1998 1 EXHIBIT 10.2 CONNETICS CORPORATION REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") is made as of the 20th day of November, 1998, by and among Connetics Corporation, a Delaware corporation (the "Company") and each of the persons listed on EXHIBIT A to this Agreement (each an "Investor" and together the "Investors"). R E C I T A L S A. Effective as of the same date as this Agreement, the Company and the Investors have entered into a Common Stock Purchase Agreement (the "Purchase Agreement") pursuant to which the Company has agreed to sell to the Investors and the Investors have agreed to purchase from the Company shares of the Company's Common Stock (all terms not otherwise defined herein shall have the meanings ascribed in the Purchase Agreement). B. A condition to the Investors' obligations under the Purchase Agreement is that the Company and the Investors enter into this Agreement in order to provide the Investors with certain rights to register the Common Stock acquired by the Investors pursuant to the Purchase Agreement. The Company desires to induce the Investors to purchase the Common Stock pursuant to the Purchase Agreement by agreeing to the terms and conditions set forth in this Agreement. NOW, THEREFORE, the parties hereby agree as follows: AGREEMENT 1. Registration Rights. The Company and the Investors covenant and agree as follows: 1.1 Definitions. For purposes of this SECTION 1: (a) The terms "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and the declaration or ordering of effectiveness of such registration statement or document; (b) The term "Registrable Securities" means (i) the shares of Common Stock issued or sold in connection with the Purchase Agreement (such shares of Common Stock are collectively referred to as the "Shares" or "Stock") and (ii) any other shares of common stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the Stock; provided, that the foregoing definition shall exclude in all cases any Registrable Securities sold by a person in a transaction in which his or her rights under this Agreement are not assigned. Notwithstanding the foregoing, shares of common stock shall 2 only be treated as Registrable Securities if and so long as they have not been (x) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (y) sold in a transaction exempt from the registration and prospectus delivery requirements under Section 4(1) of the Securities Act so that all transfer restrictions, and restrictive legends with respect thereto, if any, are removed upon the consummation of such sale; (c) The number of shares of "Registrable Securities then outstanding" shall be determined by the number of shares of Common Stock then outstanding which are Registrable Securities, plus the number of shares of common stock issuable pursuant to then exercisable or convertible securities which are Registrable Securities; (d) The term "Holder" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with this Agreement; (e) The term "Form S-3" means such form under the Securities Act as in effect on the date hereof or any successor form under the Securities Act; and (f) The term "SEC" means the Securities and Exchange Commission. 1.2 Registration. The Company will use its reasonable best efforts to effect a registration to permit the sale of the Registrable Securities as described below, and pursuant thereto the Company will: (a) prepare and file within 20 days and use its reasonable best efforts to have declared effective by the SEC within 45 days after the Closing, a registration statement on Form S-3 relating to resale of all of the shares of the Registrable Securities and use its reasonable best efforts to cause such registration statement to remain continuously effective for a period which will terminate when all Registrable Securities covered by such registration statement, as amended from time to time, have been sold or when the Registrable Securities may be sold under Rule 144(k) under the Securities Act; (b) prepare and file with the SEC such amendments and post-effective amendments to the registration statement and any prospectus as may be necessary to keep such registration statement effective for the period specified in SECTION 1.2(A) and to comply with the provisions of the Securities Act and the Exchange Act with respect to the distribution of all Registrable Securities; (c) notify each Investor promptly and confirm such notice in writing (i) when the prospectus or any supplement or post-effective amendment has been filed and, with respect to the registration statement or any post-effective amendment, when the same has become effective, (ii) of any request by the SEC for amendments or supplements to the registration statement or prospectus or for additional information, (iii) of the issuance by the SEC of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings for that purpose, and (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; 3 (d) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the registration statement at the earliest possible moment; (e) furnish to each Investor, without charge, at least one copy of the registration statement and any post-effective amendment thereto, including financial statements and schedules, and upon an Investor's request, all documents incorporated therein by reference and all exhibits thereto (including those incorporated by reference); (f) deliver to each Investor, without charge, as many copies of the prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities; (g) cause all Registrable Securities covered by the registration statement to be listed on each securities exchange or market on which similar securities issued by the Company are then listed, and if the securities are not so listed to use its reasonable best efforts promptly to cause all such securities to be listed on either the New York Stock Exchange, the American Stock Exchange or the Nasdaq Stock Market; (h) use reasonable best efforts to qualify or register the Registrable Securities for sale under (or obtain exemptions from the application of) the Blue Sky laws of such jurisdictions as are applicable. The Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any such jurisdiction where it is not presently qualified or where it would be subject to general service of process or taxation as a foreign corporation in any jurisdiction where it is not now so subject; (i) otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the SEC under the Securities Act and the Exchange Act and take such other actions as may be reasonably necessary to facilitate the registration of the Registrable Securities hereunder; and (j) expenses incurred in connection with a registration requested pursuant to this SECTION 1.2 shall be borne by the Company, including all registration, filing, qualification, printers' and accounting fees but excluding any underwriters' discounts or commissions and any fees and disbursements of any counsel for the selling Holders (such fees or discounts, if any, to be borne pro rata by the Holders participating in the registration). 1.3 Restrictions; Procedure For Sales Pursuant To A Registration Statement. (a) Each Holder agrees to the following restrictions on and procedures for sales made pursuant to a registration statement: (i) Notice to Company. If any Holder proposes to sell any Shares, the Holder shall notify the Company of its intent to do so at least three (3) business days prior to the date of such sale (the "Notice of Sale"), by tendering a Notice of Sale in substantially the 4 form attached as EXHIBIT B. Alternatively, the Holder may give the Notice of Sale verbally by telephoning and speaking directly with John L. Higgins or the then current Chief Financial Officer at the Company at (650) 843-2800, and following up by immediately sending a written Notice of Sale. Providing the Notice of Sale to the Company shall conclusively be deemed to establish an agreement by such Holder to comply with the registration provisions herein described, and the Notice of Sale shall be deemed to constitute a representation that any information previously supplied by such Holder is accurate as of the date of such Notice of Sale. (ii) Delay of Sale. The Company may refuse to permit the Holder to resell any Shares for a specified period of time; provided, however, that (a) in order to exercise this right, the Company must deliver a certificate in writing to the Holder to the effect that the registration statement in its then current form contains an untrue statement of material fact or omits to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading, (b) in no event shall such delay exceed twenty (20) days, (c) in no event shall this right of delay be exercised on more than two (2) occasions in any twelve (12) month period, and (d) during any suspension as contemplated by this SECTION 1.4 (A)(II), the Company will not allow any of its officers or directors to buy or sell shares of the Company's securities. (b) Representations of Holders. Each Holder hereby represents to and covenants with the Company that, during the period in which a registration statement effected pursuant to SECTION 1.2 remains effective, such Holder will: (i) not engage in any stabilization activity in connection with any of the Company's securities; (ii) cause to be furnished to any purchaser of the Shares and to the broker-dealer, if any, through whom Shares may be offered, a copy of the Prospectus; and (iii) not bid for or purchase any securities of the Company or any rights to acquire the Company's securities, or attempt to induce any person to purchase any of the Company's securities or any rights to acquire the Company's securities other than as permitted under the Securities Exchange Act of 1934, as amended ("Exchange Act"). (c) Information for Use in Registration Statement. Each Holder represents and warrants to the Company that such Holder has completed the information requested by the Selling Holder's Questionnaire attached as EXHIBIT C to this Agreement (the "Questionnaire"), and further represents and warrants to the Company that all information provided by such Holder in the Questionnaire is true, accurate and complete. Each Holder understands that the written information in the Questionnaire and all written representations made in this Agreement are being provided to the Company specifically for use in, or in connection with, the registration statement and the Prospectus, and has executed this Agreement with such knowledge. 1.4 Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this SECTION 1 with respect to the Registrable 5 Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. 1.5 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any dispute that might arise with respect to the interpretation or implementation of this SECTION 1. 1.6 Indemnification. In the event any Registrable Securities are included in a registration statement under this SECTION 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the Securities) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities or the Exchange Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities, the Exchange Act or any state securities law; and the Company will pay to each such Holder, underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this SUBSECTION 1.6(A) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Securities, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for 6 use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this SUBSECTION 1.6(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this SUBSECTION 1.6(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, that, in no event shall any indemnity under this SUBSECTION 1.6(b) exceed the net proceeds from the offering received by such Holder, except in the case of willful fraud by such Holder. (c) Promptly after receipt by an indemnified party under this SECTION 1.6 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this SECTION 1.6, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the reasonable fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this SECTION 1.6, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this SECTION 1.6. (d) If the indemnification provided for in this SECTION 1.6 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations; provided that, in no event shall any contribution by a Holder under this SUBSECTION 1.6(d) exceed the net proceeds from the offering received by such Holder, except in the case of willful fraud by such Holder. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. 7 (e) The obligations of the Company and Holders under this SECTION 1.6 shall survive the completion of any offering of Registrable Securities in a registration statement under this SECTION 1. 1.7 Reports Under Securities Exchange Act Of 1934. With a view to making available to the Holders the benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144, so long as the Company remains subject to the periodic reporting requirements under Sections 13 or 15(d) of the Exchange Act; (b) take such action, including the voluntary registration of its Common Stock under Section 12 of the Exchange Act, as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities; (c) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities and the Exchange Act; and (d) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of the Exchange Act and the rules and regulations promulgated thereunder, or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 2. MISCELLANEOUS. 2.1 Successors and Assigns. Except as otherwise provided in this 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 (including transferees of any of the Shares). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 2.2 Governing Law. This Agreement and all acts and transactions pursuant hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of laws. 2.3 Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8 2.4 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. 2.5 Notices. Unless otherwise provided herein, 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 hereto or as subsequently modified by written notice. In the event that 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. Notwithstanding the foregoing, any notice delivered pursuant to SECTION 1.3(E) or SECTION 1.4 hereto must be made by personal delivery or confirmed facsimile transmission. 2.6 Expenses. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 2.7 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any Registrable Securities then outstanding, each future holder of all such Registrable Securities, and the Company. 2.8 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms. 2.9 Entire Agreement. This Agreement, and the documents referred to in this Agreement (with the exception of the registration statement) constitute the entire agreement between the parties hereto pertaining to the subject matter hereof, and any and all other written or oral agreements existing between the parties hereto are expressly canceled. 9 IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. "COMPANY" Connetics Corporation Address: 3400 West Bayshore Road Palo Alto, California 94303 By: ____________________________ Facsimile: (650) 843-2899 Thomas G. Wiggans President and Chief Executive Officer INVESTOR(S) By: ____________________________ Address: 10 EXHIBIT A LIST OF INVESTORS
Name Number of Shares - ---- ---------------- 1) Alexander E. Barkas 50,000 2) John C. Kane 12,500 3) Kiley Family Partnership 10,000 4) Alta BioPharma Partners, L.P. 155,397 5) Alta Embarcadero BioPharma, LLC 5,857 6) Connetics Partners (Alta Bio), LLC 88,746 7) Domain Partners III, L.P. 241,640 8) DP III Associates, L.P. 8,360 9) Domain Partners IV, L.P. 1,220,747 10) DP IV Associates, L.P. 29,253 11) Jalaa Equities 25,000 12) New Enterprise Associates VIII, Limited Partnership 1,233,750 13) NEA Presidents Fund, L.P. 15,000 14) NEA Ventures 1998, Limited Partnership 1,250 15) Merlin BioMed Asset Management 45,000 16) Snowdon L.P. 25,000 Total shares issued: 3,167,500
11 EXHIBIT B CONNETICS CORPORATION NOTICE OF SALE Pursuant to the Registration Rights Agreement dated as of _______________, 1998 among Connetics Corporation (the "Company"), the undersigned and certain stockholders of the Company, the undersigned hereby gives notice to the Company of the undersigned's intent to sell _______ shares of the Company's Common Stock registered pursuant to the registration statement (File No. _______) filed pursuant to such Agreement. Dated: ___________________ By:_____________________________________ (signature) Name:___________________________________ (print) Title:__________________________________ (if applicable) [NOTE: THIS NOTICE OF SALE MUST BE COMPLETED AND DELIVERED (BY PERSONAL DELIVERY OR FACSIMILE) TO THE CHIEF FINANCIAL OFFICER OF THE COMPANY ON _____________________, 19__, OR THREE (3) BUSINESS DAY BEFORE THE DATE OF SALE OF THE SHARES OF THE COMPANY'S COMMON STOCK REGISTERED PURSUANT TO THE REGISTRATION STATEMENT.] 12 EXHIBIT C CONNETICS CORPORATION SELLING STOCKHOLDER'S QUESTIONNAIRE In connection with the Connetics Corporation (the "Company") Registration Statement (File No. _______________) registering certain shares of the Company's Common Stock, the undersigned represents and warrants that the information set forth below is true, accurate and complete: 1. As of the date hereof, the undersigned beneficially owns ______ shares of the Company's Common Stock. 2. Except as described below, the undersigned has not had a material relationship with the Company or any of its predecessors or affiliates within the last three years. The term "material relationship" has not been defined by the Securities and Exchange Commission (the "SEC"). However, the SEC has indicated that it will probably construe as a "material relationship" any relationship which tends to prevent arms length bargaining in dealings with a company, whether arising from a close business connection or family relationship, a relationship of control or otherwise. It seems prudent, therefore, to consider that the undersigned would have such a relationship, for example, with any organization of which the undersigned is an officer, director, trustee or partner or in which the undersigned owns, directly or indirectly, ten percent (10%) or more of the outstanding voting stock, or in which the undersigned has some other substantial interest, and with any person or organization with whom the undersigned has, or with whom any relative or spouse (or any other person or organization as to which the undersigned has any of the foregoing other relationships) has, a contractual relationship. If applicable, please describe the material relationship with the Company: Dated: ___________________ By:______________________________________ (signature) Name:____________________________________ (print) Title:___________________________________ (if applicable) EX-10.4 5 STOCK ISSUANCE AGREEMENT DATED MAY 5, 1998 1 EXHIBIT 10.4 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (this "Agreement") dated as of May 5, 1998 is between Genentech, Inc., a Delaware corporation ("Genentech"), and Connetics Corporation, a Delaware corporation (the "Company"). INTRODUCTION A. The Company and Genentech have entered into a License Agreement for Interferon Gamma dated May 5, 1998 (the "License Agreement"), along with a Supply Agreement dated as of the date of this Agreement (such Supply Agreement and License Agreement collectively referred to herein as the "Transaction Agreements"), pursuant to which the Company is acquiring from Genentech certain rights to Interferon Gamma. B. Pursuant to the License Agreement, the Company has agreed to issue to Genentech shares of its common stock, par value $0.001 per share (the "Common Stock"), having a value of $4 million, determined in accordance with the terms of this Agreement and subject to the terms and conditions herein. AGREEMENT The parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1 Definitions. (a) The following terms, as used herein, have the following meanings: "Affiliate" of an entity means, for so long as one of the following relationships is maintained, any corporation or other business entity controlled by, controlling, or under common control with another entity, with "control" meaning direct or indirect beneficial ownership of more than fifty percent (50%) of the voting stock of such corporation, or more than a fifty percent (50%) interest in the decision-making authority of such other unincorporated business entity. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Material Adverse Effect" means a material adverse effect on the condition (financial or otherwise), results of operations, assets, business or prospects of the Company, considered as a whole. 2 "1933 Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "1934 Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Person" means an individual, corporation, partnership, association, trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Register," "Registered," and "Registration" refer to a registration effected by preparing and filing a registration statement or similar document with the SEC in compliance with the 1933 Act. "Registrable Securities" means (i) the Shares, and (ii) any other shares of Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the Shares; provided, however, that the foregoing definition shall exclude in all cases any Registrable Securities sold or otherwise transferred by Genentech in a transaction in which its rights under this Agreement are not assigned. Notwithstanding the foregoing, Common Stock or other securities shall only be treated as Registrable Securities if and so long as they have not been (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) sold in a transaction exempt from the registration and prospectus delivery requirements of the 1933 Act under Section 4(1) thereof so that all transfer restrictions, and restrictive legends with respect thereto, if any, are removed upon the consummation of such sale. "Registrable Securities then outstanding" shall equal the number of shares of Common Stock outstanding which are Registrable Securities. "Form S-1" means such form under the 1933 Act in effect on the date hereof or any successor form under the 1933 Act. "Form S-3" means such form under the 1933 Act in effect on the date hereof or any successor form under the 1933 Act. "SEC" means the Securities and Exchange Commission. "Shares" means the Original Issuance Shares and the Second Issuance Shares, if any. -2- 3 (b) In addition, each of the following terms is defined in the Section set forth opposite such term:
Term Section - ---- ------- Acquisition 2.2(d) Common Stock Recitals License Agreement Recitals Original Closing 2.2(a) Original Closing Date 2.2(a) Original Issuance 2.1(a) Original Issuance Price 2.1(a) Original Issuance Shares 2.1(a) Second Closing 2.2(b) Second Closing Date 2.2(b) Second Issuance 2.1(b) Second Issuance Price 2.1(b) Second Issuance Shares 2.1(b) Transaction Agreements Recitals Violation 3.5(a)
ARTICLE II ISSUANCE OF SHARES 2.1 Issuance of Shares. Upon the terms and subject to the conditions of this Agreement, the Company agrees to issue to Genentech, and Genentech agrees to acquire from the Company, shares of the Company's Common Stock as follows: (a) Original Issuance. On the Original Closing Date (as defined below), the Company shall issue to Genentech a number of shares of Common Stock (the "Original Issuance Shares") equal to the lesser of: (i) $2,000,000 divided by the Original Issuance Price (as defined below) or (ii) 9.5% of the Company's total outstanding shares of Common Stock as of the close of business on the third trading day before the Original Closing Date (each such number of shares to be rounded to the nearest whole number). Such issuance shall be referred to herein as the "Original Issuance." The "Original Issuance Price" shall be the average daily closing price for the Company's Common Stock for the twenty (20) trading days immediately preceding (but not including) the third trading day before the Original Closing Date, as reported on the Nasdaq Stock Market. (b) Potential Second Issuance. If on the Second Closing Date (as defined below), the aggregate market value of the Original Issuance Shares is less than $4,000,000 (based upon the average daily closing price per share for the Company's Common Stock for the twenty (20) trading days immediately preceding (but not including) the third trading day before the -3- 4 Second Closing Date, as reported on the Nasdaq Stock Market (the "Second Issuance Price")), then the Company shall issue to Genentech on the Second Closing Date that number of additional shares of its Common Stock (the "Second Issuance Shares") equal to the lesser of: (i) the number of shares necessary to increase the aggregate market value of the Original Issuance Shares (based on the Second Issuance Price) and the Second Issuance Shares (based on the Second Issuance Price) to $4,000,000 or (ii) the number of shares necessary to increase the aggregate number of the Company's shares of Common Stock held by Genentech (exclusive of any shares that Genentech has purchased from parties other than the Company) to 9.9% of the Company's total outstanding shares of Common Stock as of the close of business on the third trading day before the Second Closing Date (each such number of shares to be rounded to the nearest whole number). Such issuance shall be referred to hereinafter as the "Second Issuance." (c) Cash in Lieu of Second Issuance Shares. Notwithstanding Section 2.1(b) above, in lieu of all or any portion of the Second Issuance Shares that the Company is obligated to issue to Genentech on the Second Closing Date, the Company may elect to pay Genentech the cash value of such Second Issuance Shares (based on the Second Issuance Price). In addition, if the Company is obligated to deliver to Genentech the number of Second Issuance Shares specified by clause (ii) of Section 2.1(b) rather than by clause (i) of Section 2.1(b), the Company shall pay Genentech in cash the difference between the value of Second Issuance Shares delivered under clause (ii) and the value of Second Issuance Shares that would otherwise have been delivered under clause (i). Any such cash payment under this paragraph shall be made by Company check or by a wire transfer to a bank account designated by Genentech. (d) Compliance with Rule 4460 of the Nasdaq Stock Market. Notwithstanding Section 2.1(b) above, in order to comply with Rule 4460 of the Nasdaq Stock Market, the sum of the Original Issuance Shares and the Second Issuance Shares shall not be greater than 19.9% of the total outstanding shares of Common Stock of the Company immediately prior to the Original Issuance. In the event that such sum would otherwise be greater than 19.9% of the total outstanding shares of Common Stock of the Company immediately prior to the Original Issuance, then the sum shall be reduced until such sum is equal to 19.9% of the total outstanding shares of Common Stock of the Company immediately prior to the Original Issuance, and the Company shall be obligated to pay Genentech in cash the value of the Second Issuance Shares that would have been issued on the Second Closing Date but for this subsection (based on the Second Issuance Price). 2.2 Closing Dates. (a) Original Closing Date. The closing of the acquisition and issuance of the Original Issuance Shares (the "Original Closing") shall be held at 4:00 p.m. Pacific time on the Effective Date (as defined in the License Agreement) of the License Agreement (the "Original Closing Date") subject to the satisfaction or waiver of the conditions set forth in Sections 6.1 and 6.2, or at such other time or date as the Company and Genentech may agree orally or in writing. (b) Second Closing Date. The closing of the issuance of the Second Issuance Shares (the "Second Closing"), if any, shall be held at 10:00 a.m. Pacific Standard time on -4- 5 December 28, 1998 (the "Second Closing Date") and which is following the satisfaction or waiver of the conditions set forth in Sections 6.3 and 6.4, or at such other time or date as the Company and Genentech may agree orally or in writing. (c) Location. The Original Closing and the Second Closing, if any, shall be held at the offices of Venture Law Group, 2800 Sand Hill Road, Menlo Park, CA 94025 or at such other place as the Company and Genentech may agree orally or in writing. (d) Acceleration of Second Closing Date. In the event of the sale by the Company of all or substantially all of its assets or the acquisition of the Company by another entity by means of merger or other transaction as a result of which stockholders of the Company immediately prior to such acquisition possess a minority of the voting power of the acquiring entity immediately following such acquisition (an "Acquisition"), then the Second Closing Date shall be accelerated to a date mutually acceptable to the company and Genentech, which date in no event shall be later than one (1) day prior to the closing of such Acquisition and the 9.9% ownership limitation set forth in subsection 2.1(b) shall not apply. 2.3 Delivery. Subject to the terms and conditions of this Agreement, at the Original Closing and at the Second Closing, as the case may be, or as soon as practicable thereafter, the Company will deliver to Genentech stock certificates representing the number of Shares subject to issuance hereunder. One (1) business day prior to the Original Closing Date, the Company shall provide Genentech with a letter from the Company specifying the calculation of the Original Issuance Price and the number of Original Issuance Shares to be issued at the Original Closing. One (1) business day prior to the Second Closing Date (if required), the Company shall provide Genentech with a letter from the Company specifying the calculation of the Second Issuance Price and the number of Second Issuance Shares to be issued at the Second Closing. 2.4 Restriction on Transfer. Genentech hereby agrees that, without the prior written consent of the Company, it will not, during the period commencing on the Original Closing Date and ending on the Second Closing Date, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of directly or indirectly, and Original Issuance Shares or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Original Issuance Shares, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of the Original Issuance Shares or such other securities, in cash or otherwise. ARTICLE III REGISTRATION RIGHTS AND SALE OF SHARES 3.1 Form S-3 Registration. Unless otherwise requested by Genentech, the Company will use its best efforts to prepare and file by November 1, 1998 a registration statement on Form S-3 that contemplates a distribution of the Registrable Securities on a delayed or continuous basis pursuant to Rule 415 under the 1933 Act and any related qualification or compliance with respect to all of the Registrable Securities; provided, however, that the -5- 6 Company shall not be obligated to effect any such registration, qualification or compliance if the Company shall furnish to Genentech a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing or effectiveness of the Form S-3 registration statement for a period of time deemed necessary by the Company, but in any event not to exceed 60 days. If Form S-3 is not available for such offering by reason of any act or omission of the Company, the Company shall prepare and file by November 1, 1998 a registration statement on Form S-1 for the same purposes and subject to the same conditions set forth in this paragraph. 3.2 Obligations of the Company. When required under this Article III to effect the registration of the Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Use its best efforts to cause such registration statement to become effective prior to the Second Closing Date, and, upon the request of Genentech, keep such registration statement effective until the date on which the distribution contemplated in such registration statement is complete, and update such registration statement during such period of effectiveness; provided, however, if the Company shall furnish to Genentech a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to remain effective, the Company shall have the right to suspend the effectiveness of the registration statement for a period of time deemed necessary by the Company, but in any event not to exceed 60 days. (b) Furnish to Genentech such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the 1933 Act, and such other documents as it may reasonably request in order to facilitate the disposition of Registrable Securities. (c) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by Genentech; provided, that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service or process in any such states or jurisdictions. 3.3. Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Article III with respect to the Registrable Securities that Genentech shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of the Registrable Securities. 3.4 Expenses of Registration. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications pursuant to this Article III, including (without limitation) all registration, filing and qualification fees, printers' -6- 7 and accounting fees, fees and disbursements of counsel for the Company, shall be borne by the Company. 3.5 Indemnification. In the event any Registrable Securities are included in a registration statement under this Article III: (a) To the extent permitted by law, the Company will indemnify and hold harmless Genentech, each of its officers, each of its directors, any underwriter (as defined in the 1933 Act) for Genentech and each person, if any, who controls Genentech or such underwriter within the meaning of the 1933 Act or the 1934 Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the 1933 Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"); (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the 1933 Act, the 1934 Act or any state securities law; and the Company will pay to Genentech and each such underwriter or controlling person, as incurred, any legal or other expenses, reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 3.5(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by Genentech or any such underwriter or controlling person. (b) To the extent permitted by law, Genentech will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the 1933 Act, any underwriter, any other person selling securities in such registration statement and any controlling person of any such underwriter or other person, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the 1933 Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by Genentech expressly for use in connection with such registration; and Genentech will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 3.5(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 3.5(b) shall not -7- 8 apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of Genentech, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, in no event shall Genentech's total indemnification obligation exceed the aggregate amounts Genentech has received from the sale of the Shares pursuant to the registration statement filed under this Article III. (c) Promptly after receipt by an indemnified party under this Section 3.5 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 3.5, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnifying parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the reasonable fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 3.5, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 3.5. (d) If the indemnification provided for in this Section 3.5 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. -8- 9 (f) The obligations of the Company and Genentech under this Section 3.5 shall survive the completion of any offering of Registrable Securities in a registration statement under this Article III, and otherwise. 3.6 PROCEDURE FOR SALE OF SHARES. Genentech shall notify the Company at least twenty trading days in advance of the first proposed sale or other transfer of any Registrable Securities. Genentech and the Company agree and acknowledge that it is in their mutual interest that disposition of the Registrable Securities be accomplished in a manner that does not disrupt or undermine the trading market for the Company's Common Stock on the NASDAQ Stock Market, and the parties will work together to explore methods of disposition in order to achieve such goal. Genentech will also consider in good faith any request by the Company to delay such sale or transfer for a reasonable time or to arrange such sale or transfer through an underwriter or market maker approved by the Company. In addition, Genentech agrees it will not transfer or sell more than ten percent (10%) of the total number of Shares (including the Second Issuance Shares) in any calendar week, provided that the foregoing limitation shall not apply to any block sale or transfer arranged between Genentech and a third party. 3.7 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Article III may not be assigned by Genentech without the Company's prior written consent, unless such assignment is to an Affiliate of Genentech. Any such assignment consented to by the Company shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the 1933 Act. 3.8 TERMINATION OF REGISTRATION RIGHTS. Genentech shall not be entitled to exercise any right provided for in this Article III, and the Company shall have no further obligations under this Article III, after such time as Rule 144 or another similar exemption under the 1933 Act is available for the sale of all of Genentech's shares during a three (3) month period without registration. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Genentech as of the date hereof that: 4.1 ORGANIZATION AND STANDING. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the requisite corporate power and authority to own its properties, to carry on its business as now being conducted, and to carry out the transactions contemplated under the Transaction Agreements. Other than as disclosed in its SEC Filings (as defined below) or as contemplated by the License Agreement, the Company has no subsidiaries or direct or indirect ownership interest in any firm, corporation, association or business which, either individually or in the aggregate, are material to the business of the Company. The Company is qualified to do business and is in good standing as a foreign corporation in every jurisdiction in which its ownership of property or -9- 10 conduct of business requires it so to be qualified and in which the failure to so qualify would have a Material Adverse Effect on the Company. 4.2 CORPORATE AUTHORIZATION. The execution, delivery and performance by the Company of this Agreement has been duly authorized by all necessary corporate action on the part of the Company. This Agreement constitutes a valid and binding agreement of the Company enforceable in accordance with its terms, except as (i) the enforceability hereof and thereof may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally, (ii) the availability of equitable remedies (e.g., specific performance, injunctive relief, and other equitable remedies) may be limited by equitable principles of general applicability, (iii) to the extent the indemnification provisions contained in this Agreement may be limited by applicable federal or state securities law; and (iv) that no representation is made regarding the effect of laws relating to competition, antitrust, intellectual property or misuse. 4.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance by the Company of this Agreement will not require any action by, or filing with, any governmental body, agency, or official other than compliance with any applicable requirements of the 1933 Act, the 1934 Act and state Blue Sky laws. 4.4 NON-CONTRAVENTION. The execution, delivery and performance by the Company of this Agreement does not (i) violate the certificate of incorporation or bylaws of the Company, (ii) assuming compliance with the matters referred to in Section 4.3, violate any material applicable law, rule, regulation, judgment, injunction, order or decree known to it, or (iii) require any consent or other action by any Person under, constitute a material default under, or give rise to any material right of termination, cancellation or acceleration of any material right or obligation of the Company to a loss of any material benefit to which the Company is entitled under, any material written agreement or other material written instrument binding upon the Company or any material license, franchise, permit or other similar authorization held by the Company. 4.5 VALIDITY OF SHARES. The Shares, when issued, sold and delivered in accordance with the terms and for the consideration set forth in this Agreement, will be duly and validly issued, fully paid and nonassessable and free and clear of all pledges, liens, encumbrances and restrictions other than the restrictions on transfer set forth in Section 2.4 and Section 5.3 of this Agreement. 4.6 SEC FILINGS. The Company has filed with the SEC via the EDGAR system (i) its Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and (ii) all other reports required to be filed by it with the SEC pursuant to the 1934 Act since December 31, 1997 (the "SEC Filings"). 4.7 ABSENCE OF CERTAIN CHANGES. Since December 31, 1997 and except as contemplated by this Agreement or disclosed in any SEC Filings, the business of the Company has been conducted in the ordinary course consistent with past practices and there has not been -10- 11 any event, occurrence, development or state of circumstances or facts which, individually or in the aggregate, has had a Material Adverse Effect on the Company. 4.8 Changes. Except as set forth in the SEC Filings, since December 31, 1997, the Company has not, to the extent material to the Company (i) incurred any debts, obligations or liabilities, absolute, accrued or contingent, whether due or to become due, other than in the ordinary course of business, (ii) mortgaged, pledged or subjected to lien, charge, security interest or other encumbrance any of its assets, tangible or intangible, (iii) waived any debt owed to the Company, (iv) satisfied or discharged any lien, claim or encumbrance or paid any obligation other than in the ordinary course of business or as contemplated in the SEC Filings, (v) declared, set aside or paid any dividends or other distribution with respect to the capital stock of the Company, (vi) amended any material contract or arrangement by which the Company or any of its assets is bound, or (vii) sold, assigned or transferred any of its patents, trademarks, copyrights, trade secrets or other intangible assets. Other than as may be set forth in the SEC Filings, there has been no material adverse change in the financial condition or business, assets or properties, liabilities or operating results to the Company since the date of the financial statements contained in the SEC Filings other than normal recurring operating losses, and there has not occurred any loss, destruction or damage affecting the business, properties, prospects or financial condition of the Company, whether or not insured, which has or may have a Material Adverse Effect on the Company. 4.9 Litigation. Other than as described in the SEC Filings, there are no legal actions, suits, arbitrations or other legal, administrative or governmental proceedings pending or, to the best of the Company's knowledge, threatened against the Company or its properties, assets or business, and the Company is not aware of any facts which might result in or form the basis for any such action, suit or other proceeding, in each case which, if adversely determined, would, individually or in the aggregate, affect the execution and delivery of the Transaction Agreements or the performance by the Company of its obligations hereunder and thereunder or have a Material Adverse Effect on the Company. The Company is not in default with respect to any judgement, order or decree of any court or any governmental agency or instrumentality, which default would have a Material Adverse Effect on the Company. 4.10 Compliance With Applicable Laws and Other Instruments. To the best of the Company's knowledge, the business and operations of the Company have been and are being conducted in accordance with all applicable laws, rules and regulations of all governmental authorities, except for such violations of applicable laws, rules and regulations which would not, individually or in the aggregate, have a Material Adverse Effect on the Company. 4.11 Reports and Financial Statements. As of their respective filing dates, the SEC Filings were prepared in all respects in accordance with the applicable requirements of the 1933 Act or the 1934 Act, as the case may be. The audited consolidated financial statements and unaudited interim financial statements of the Company included in the SEC Filings comply as to form in all respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, and the financial statements included in the SEC Filings have been prepared in accordance with United States generally accepted accounting -11- 12 principles applied on a consistent basis (except as may be indicated therein on the notes thereto) and fairly present the financial position of the Company as at the dates thereof and the results of its operations and cash flows for the periods then ended, subject, in the case of the unaudited interim financial statements, to normally recurring year-end adjustments and any other adjustments described in such financial statements. 4.12 Securities Laws; Governmental Approvals. Based in part upon the representations and warranties of Genentech contained in Article V of this Agreement, the offer, sale, issuance and delivery to Genentech of the Shares as contemplated by this Agreement are exempt from the registration requirements of the 1933 Act, and from the registration or qualification requirements of the laws of any applicable state or other U.S. jurisdiction. 4.13 Capital Stock. All of the outstanding shares of the Company's capital stock are validly issued, fully paid and nonassessable and were issued in compliance with all applicable federal and state securities laws. Except as set forth in the SEC Filings, the Company has not agreed to register the sale of any of its securities under the 1933 Act, and there are no outstanding subscriptions, options, warrants, calls, contracts, demands, commitments, conversion rights or other agreements or arrangements of any character or nature whatever under which the Company is or may be obligated to issue its Common Stock, preferred stock or warrants or options to purchase Common Stock or preferred stock. No holder of any security of the Company is entitled to any rights of first refusal, preemptive or similar rights to purchase any securities of the Company (including, without limitation, the Shares). 4.14 No Brokers or Finders. To the knowledge of the Company, no person, firm or corporation has or will have, as a result of any act or omission of the Company, any right, interest or valid claim against Genentech for any commission, fee or other compensation as a finder or broker in connection with the transactions contemplated by this Agreement. 4.15 Compliance with Environmental Law. Except as disclosed in the SEC Filings, the Company is not in violation in any material respect of any applicable statute, law, or regulation relating to the environment or occupational health and safety, and, to the best of the Company's knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. To the best of the Company's knowledge, the Company does not have any material liability to any governmental authority or other third party arising under or as a result of any such past or existing statute, law or regulation. 4.16 SEC Filings. The SEC Filings, when read as a whole, as of the date such SEC Filings were made, did not contain any untrue statements of a material fact and do not omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.17 Filing of Reports. Since the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, the Company has filed with the SEC all reports and other material required to be filed by it therewith pursuant to Section 13, 14 or 15(d) of the Exchange Act, and the Company is presently eligible to register the resale of the Shares by Genentech on a Registration Statement on Form S-3. -12- 13 4.18 Insurance. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed. The Company has in full force and effect products liability and errors and omission insurance in amounts customary for companies similarly situated. 4.19 Tax Returns, Payments, and Elections. The Company has filed all tax returns and reports as required by law. These returns and reports are true and correct in all material respects. The Company has paid all taxes and other assessments due, except those contested by it in good faith. The provision for taxes of the Company as shown in the financial statements 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 ("Code"), to be treated as a S corporation or a collapsible corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor has it made any elections pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation, or amortization) that would have a Material Adverse Effect on the Company. The Company has never had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge. Since the date of the financial statements, the Company has made adequate provisions on its books of account for all taxes, assessments, and governmental charges with respect to its business, properties, and operations for such period. The Company has withheld or collected from each payment made to each of its employees, the amount of all taxes, including, but not limited to, federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositaries. 4.20 HSR Filing. Acting under delegated authority of the Company's Board of Directors, the Company's officers have determined that the fair market value of the exclusive license granted under the License Agreement is less than $15,000,000 and therefore that the execution and delivery of, or the performance of the obligations of the Company or Genentech under, the Transaction Documents (including, without limitation, the consummation of the Original Closing and the Second Closing (collectively, the "Closings") and the issuance of the Shares to Genentech at the Closings) shall not require that filings under the HSR Act, or the rules or regulations promulgated thereunder, be made prior to the Closings by the Company, Genentech, or their respective Affiliates or ultimate parent entities, if any. ARTICLE V REPRESENTATIONS AND WARRANTIES OF GENENTECH 5.1 Representations and Warranties. Genentech hereby represents and warrants to the Company as of the date hereof as follows: (a) Genentech is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware. -13- 14 (b) Genentech has taken all necessary corporate action necessary for the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby, and this Agreement constitutes a valid and legally binding obligation of Genentech enforceable in accordance with its terms. (c) The execution, delivery and performance by Genentech of this Agreement does not (i) violate the certificate of incorporation or bylaws or Genentech, (ii) assuming compliance with the matters referred to in Section 4.3, violate any material applicable law, rule, regulation, judgment, injunction, order or decree known to it, or (iii) require any consent or other action by any Person under, constitute a material default under, or give rise to any material right of termination, cancellation or acceleration of any material right or obligation of Genentech to a loss of any material benefit to which Genentech is entitled under, any material written agreement or other material written instrument binding upon Genentech or any material license, franchise, permit or other similar authorization held by Genentech. (d) The execution, delivery and performance of this Agreement by Genentech will not require any consent, approval, authorization or permit of, or filing with or without notification to, any governmental or regulatory authority, United States or foreign, except for applicable requirements, if any, of the 1933 Act or 1934 Act, and Blue Sky Laws. 5.2 Purchase of Shares for Investment. Genentech acknowledges that the Shares have not been registered under the 1933 Act or any state securities laws and that the Company has no present intention of registering the Shares, except as provided in Article III hereof. Genentech represents and warrants that it is acquiring the Shares for investment purposes only, and not as a nominee or agent, and not with a view to, or for resale or redistribution of such Shares in connection with, any public offering or distribution thereof, except as provided in Article III hereof. By executing this Agreement, Genentech further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Shares. 5.3 Restricted Securities. Genentech understands that the Shares may not be sold, transferred, or otherwise disposed of without registration under the 1933 Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Shares or an available exemption from registration under the 1933 Act, the Shares must be held indefinitely. In particular, Genentech is aware that the shares may not be sold pursuant to Rule 144 promulgated under the 1933 Act unless the conditions of that Rule are met. 5.4 Legend. Each certificate representing the Shares shall be endorsed with the following legend: THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE TRANSFER IS MADE IN COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR -14- 15 THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE, TRANSFER OR ASSIGNMENT IS EXEMPT FROM THE REGISTRATION AND DELIVERY REQUIREMENTS OF SUCH ACT. The Company need not register a transfer of any Shares and may instruct its transfer agent not to register the transfer of the Shares, unless the conditions specified in the foregoing legend are satisfied. 5.5 Access to Information. Genentech acknowledges that it has received all information it has requested regarding the Company's business, management, and financial affairs and the terms and conditions of the issuance of the Shares. Without limiting the foregoing, Genentech acknowledges that the Company's periodic reports required to the filed with the SEC under the 1934 Act are available to Genentech on the SEC's World Wide Web home page at http://www.sec.gov and that Genentech has obtained and reviewed such reports to the extent it believes necessary to evaluate an investment in the Company. ARTICLE VI CONDITIONS TO CLOSINGS 6.1 Conditions to Original Issuance Obligations of Genentech. The obligation of Genentech to consummate the Original Issuance is subject to the satisfaction or Genentech's waiver, on or prior to the Original Closing Date, of each of the following conditions: (a) The representations and warranties made by the Company in Article IV shall be true and correct when made, and shall be true and correct on the Original Closing Date with the same force and effect as if they had been made on and as of each of such dates, and the Company shall have performed all covenants, obligations and conditions required to be performed or observed by the Company on or prior to the Original Closing Date, or such performance shall have expressly waived by Genentech in writing. (b) The Company shall have obtained all consents (including all third party and governmental or regulatory consents, approvals or authorizations required in connection with the valid execution and delivery of this Agreement), permits and waivers necessary or appropriate for consummation of the transactions contemplated by the Original Issuance under this Agreement. (c) No Delaware, U.S. or U.S. state governmental authority or other agency or commission or Delaware, U.S. or U.S. state court of competent jurisdiction shall have enacted, issued, promulgated, endorsed, or entered any law, rule, regulation, executive order, decree, injunction or other order which is then in effect and has the effect of making illegal the issuance of the Original Issuance Shares to Genentech or otherwise preventing the consummation of any of the transactions contemplated under this Agreement. -15- 16 (d) The Company and Genentech shall have executed and delivered the Transaction Agreements. (e) There shall be no temporary restraining order, preliminary injunction or permanent injunction or other order preventing the consummation of the Original Issuance issued by any court which remains in effect, no litigation seeking the issuance of such an order or injunction and no claims or actions threatened or pending which have a reasonably likely prospect of resulting in such order or injunction preventing the consummation of the Original Issuance. (f) The Company shall not be in material breach of the Transaction Agreements. (g) Genentech shall have received from the Company's counsel an opinion in form and substance reasonably satisfactory to Genentech's Counsel regarding the Original Issuance. 6.2 Conditions to the Original Issuance Obligations of the Company. The obligations of the Company to issue the Original Issuance Shares is subject to the satisfaction or the Company's waiver, on or prior to the Original Closing Date, of each of the following conditions: (a) The representations and warranties made by Genentech in Article V shall be true and correct when made, and shall be true and correct on the Original Closing Date with the same force and effect as if they had been made on and as of such date and Genentech shall have performed all covenants, obligations and conditions required to be performed or observed by Genentech on or prior to the Original Closing Date or such performance shall have been expressly waived by the Company in writing. (b) The Company and Genentech shall have executed and delivered the Transaction Agreements. (c) Genentech shall have obtained all consents (including all third party and governmental or regulatory consents, approvals or authorizations required in connection with the valid execution and delivery of this Agreement), permits and waivers necessary or appropriate for consummation of the transactions contemplated by the Original Issuance under this Agreement. (d) No Delaware, U.S. or U.S. state governmental authority or other agency or commission or Delaware, U.S. or U.S. state court of competent jurisdiction, shall have enacted, issued, promulgated, enforced, or entered any law, rule, regulation, executive order, decree, injunction or other order which is then in effect and has the effect of making illegal the issuance of the Original Issuance Shares to Genentech or otherwise preventing the consummation of any of the transactions contemplated under this Agreement. -16- 17 6.3 Conditions to Second Closing Obligations of Genentech. The obligation of Genentech to consummate the Second Closing is subject to the satisfaction or Genentech's waiver, on or prior to the Second Closing Date, of each of the following conditions: (a) The representations and warranties made by the Company in Section 4.1 through and including Section 4.5, Section 4.10 and Section 4.12 shall be true and correct on the Second Closing Date with the same force and effect as if they had been made on and as of such date, and the Company shall have performed all covenants, obligations and conditions required to be performed or observed by it on or prior to the Second Closing Date. (b) The Company shall have obtained all consents (including all third party and governmental or regulatory consents, approvals or authorizations required in connection with the valid execution and delivery of this Agreement), permits and waivers necessary or appropriate for consummation of the transactions contemplated by the Second Closing under this Agreement. (c) No Delaware, U.S. or U.S. state governmental authority or other agency or commission or Delaware, U.S. or U.S. state court of competent jurisdiction shall have enacted, issued, promulgated, enforced, or entered any law, rule, regulation, executive order, decree, injunction or other order which is then in effect and has the effect of making illegal the issuance of the Second Issuance Shares to Genentech or otherwise preventing the consummation of any of the transactions contemplated under this Agreement. (d) There shall be no temporary restraining order, preliminary injunction or permanent injunction or other order preventing the consummation of the Second Closing issued by any court which remains in effect, no litigation seeking the issuance of such an order or injunction and no claims or actions threatened or pending which have a reasonably likely prospect of resulting in such order or injunction preventing the consummation of the Second Closing. (e) At the time of the closing on the Second Closing Date, the issuance of the Shares to Genentech shall be legally permitted by all laws and regulations to which Genentech and the Company are subject. (f) There shall be no material default or breach under the Transaction Agreements by the Company. 6.4 Conditions to Second Closing Obligations of the Company. The obligations of the Company to issue the Second Issuance Shares (if any) is subject to the satisfaction or the Company's waiver, on or prior to a Second Closing Date, of each of the following conditions: (a) The representations and warranties made by Genentech in Article V shall be true and correct when made, and shall be true and correct on the Second Closing Date with the same force and effect as if they had been made on and as of such date. -17- 18 (b) Genentech and the Company shall have obtained all consents (including all third party and governmental or regulatory consents, approvals or authorizations required in connection with the valid execution and delivery of this Agreement), permits and waivers necessary or appropriate for consummation of the transactions contemplated by the Second Closing under this Agreement. (c) No Delaware, U.S. or U.S. state governmental authority or other agency or commission or Delaware, U.S. or U.S. state court of competent jurisdiction shall have enacted, issued, promulgated, enforced, or entered any law, rule, regulation, executive order, decree, injunction or other order which is then in effect and has the effect of making illegal the issuance of the Second Issuance Shares to Genentech or otherwise preventing the consummation of any of the transactions contemplated under this Agreement. (d) There shall be no temporary restraining order, preliminary injunction or permanent injunction or other order preventing the consummation of the Second Closing issued by any court which remains in effect, no litigation seeking the issuance of such an order or injunction and no claims or actions threatened or pending which have a reasonably likely prospect of resulting in such order or injunction preventing the consummation of the Second Closing. (e) At the time of the closing on the Second Closing Date, the issuance of the Shares to Genentech shall be legally permitted by all laws and regulations to which Genentech and the Company are subject. ARTICLE VII ADDITIONAL COVENANTS OF THE COMPANY The Company covenants and agrees that: 7.1 Reservation of Shares: The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock such number of shares of Common Stock as shall be sufficient to complete the issuance of the Shares under this Agreement. 7.2 Maintenance of Registration under the 1934 Act during Pendency of S-3 Registration Statement. The Company shall use its best efforts to maintain the effectiveness of the registration of its Common Stock under Section 12(g) of the 1934 Act during the effectiveness of the registration statement filed under Article III. 7.3 Confidentiality. Except for information disclosed under the License Agreement (which shall be governed by Section 7.0 of the License Agreement), the Company will hold, and will use all reasonable business efforts to cause its respective officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold, in confidence, all confidential documents and information concerning Genentech furnished to the Company in connection with the transactions contemplated by this Agreement and the Transaction Agreements, except to the extent that such information can be shown to have been (i) previously known on a -18- 19 nonconfidential basis by the Company, (ii) in the public domain through no fault of the Company of (iii) later lawfully acquired by the Company from sources other than Genentech; provided that the Company may disclose such information to its officers, directors, employees, accountants, counsel, consultants, advisors and agents in connection with the transactions contemplated by this Agreement and the Transaction Agreements so long as (a) such disclosure is necessary for the evaluation and consummation of the transactions contemplated by this Agreement and the Transaction Agreements and (b) such Persons are informed by the Company of the confidential nature of such information and are bound in writing by the Company to treat such information confidentially. The Company shall exercise at least the same care with respect to such information as they would take to preserve the confidentiality of their own similar information. If this Agreement is terminated, the Company use all reasonable business efforts to cause their respective officers, directors, employees, accountants, counsel, consultants, advisors and agents to, destroy or deliver to Genentech, upon request, all documents and other materials, and all copies thereof, obtained by the Company or on their behalf from Genentech in connection with this Agreement or the Transaction Agreements that are subject to such confidence. This Section 7.3 shall survive any termination of this Agreement. ARTICLE VIII ADDITIONAL COVENANTS OF GENENTECH Genentech covenants and agrees that: 8.1 Confidentiality. Except for information disclosed under the License Agreement (which shall be governed by Section 7.0 of the License Agreement), Genentech will hold, and will use all reasonable business efforts to cause its respective officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold, in confidence, all confidential documents and information concerning the Company furnished to Genentech in connection with the transactions contemplated by this Agreement and the Transaction Agreements, except to the extent that such information can be shown to have been (i) previously known on a nonconfidential basis by Genentech, (ii) in the public domain through no fault of Genentech or (iii) later lawfully acquired by Genentech from sources other than the Company; provided that Genentech may disclose such information to its officers, directors, employees, accountants, counsel, consultants, advisors and agents in connection with the transactions contemplated by this Agreement and the Transaction Agreements so long as (a) such disclosure is necessary for the evaluation and consummation of the transactions contemplated by this Agreement and the Transaction Agreements and (b) such Persons are informed by Genentech of the confidential nature of such information and are bound in writing by Genentech to treat such information confidentially. Genentech shall exercise at least the same care with respect to such information as they would take to preserve the confidentiality of their own similar information. If this Agreement is terminated, Genentech use all reasonable business efforts to cause their respective officers, directors, employees, accountants, counsel, consultants, advisors and agents to, destroy or deliver to the Company, upon request, all documents and other materials, and all copies -19- 20 thereof, obtained by Genentech or on their behalf from the Company in connection with this Agreement or the Transaction Agreements that are subject to such confidence. This Section 8.1 shall survive any termination of this Agreement. 8.2 1934 ACT FILINGS. Genentech agrees and acknowledges that it shall have sole responsibility for making any filings with the SEC pursuant to Sections 13 and 16 of the 1934 Act as a result of its acquisition of the Shares and any future retention or transfer thereof. ARTICLE IX ADDITIONAL COVENANTS OF GENENTECH AND THE COMPANY Genentech and the Company covenant and agree that: 9.1 BEST EFFORTS. Subject to the terms and conditions of this Agreement, Genentech and the Company will use their best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary or desirable under applicable laws and regulations to consummate the transactions contemplated by this Agreement and the Transaction Agreements. The Company and Genentech agree to execute and deliver such other documents, certificates, agreements and other writings and to take such other actions as may be necessary or desirable in order to consummate or implement expeditiously the transactions contemplated by this Agreement and the Transaction Agreements. 9.2 CERTAIN FILINGS. The Company and Genentech shall cooperate with one another (i) in determining whether any action by or in respect of, or filing with, any governmental body, agency, official or authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with the consummation of the transactions contemplated by this Agreement and the Transaction Agreements and (ii) in taking such actions or making any such filings, furnishing information required in connection therewith and seeking timely to obtain any such actions, consents, approvals or waivers. 9.3 PUBLICITY. The Company and Genentech agree that, except as may otherwise be required by applicable laws, regulations, rules, or orders, including the disclosure requirements of the SEC and the Nasdaq Stock Market, no information concerning this Agreement and the transactions contemplated herein (except information which is already in the public domain) shall be made public by either party without the prior written consent of the other party. Notwithstanding the foregoing, with respect to complying with the disclosure requirements of the SEC, in connection with any required SEC filing of the Transaction Agreements by the Company, the Company shall seek confidential treatment of portions of the Transaction Agreements from the SEC and Genentech shall have the right to review and comment on the portions of the Transaction Agreements for which confidentiality is sought prior to their being filed with the SEC. Genentech shall provide its comments, if any, on such application as soon as practicable and in no event later than seven (7) days after such application is provided to Genentech. -20- 21 ARTICLE X SURVIVAL 10.1 Survival. The representations and warranties of the parties hereto contained in this Agreement or in any certificate or other writing delivered pursuant hereto or in connection herewith shall survive the Original Closing for a period of two (2) years. ARTICLE XI TERMINATION 11.1 Grounds for Termination. This Agreement may be terminated at any time prior to the Original Closing or the Second Closing, as applicable: (i) by mutual written agreement of the Company and Genentech; or (ii) by either the Company or Genentech if there shall be any law or regulation that makes consummation of the issuances of Shares contemplated in this Agreement illegal or otherwise prohibited or if consummation of the issuances of Shares contemplated hereby would violate any nonappealable final order, decree or judgment of any court or governmental body having competent jurisdiction; and in such event, the Company shall be obligated to pay to Genentech in cash the value of the Original Issuance Shares and the Second Issuance Shares (if any), as the case may be, that would have been issued on the originally scheduled Original Closing Date and Second Closing Date, but for this subsection (based upon the average daily closing price per share for the Company's Common Stock for the twenty (20) trading days immediately preceding (but not including) the third trading day before the originally scheduled Original Closing Date and based upon the average daily closing price per share for the Company's Common Stock for the twenty (20) trading days immediately preceding (but not including) the third trading day before the originally scheduled Second Closing Date, as the case may be, as reported in Nasdaq Stock Market). 11.2 Effect of Termination. If this Agreement is terminated as permitted by Section 11.1, termination shall be without liability of either party (or any stockholder, director, officer, employee, agent, consultant or representative of such party) to the other party to this Agreement; provided that if such termination shall result from the willful failure of either party to fulfill a condition to the performance of the obligations of the other party, failure to perform a covenant of this Agreement or breach by either party hereto of any representation or warranty or agreement contained herein, such party shall be fully liable for any and all damages incurred or suffered by the other party as a result of such failure or breach. The provisions of Sections 7.3 and 8.1 shall survive any termination hereof pursuant to Section 11.1 or otherwise. ARTICLE XII MISCELLANEOUS -21- 22 12.1 Notices. Any notices permitted or required by this Agreement shall be sent by facsimile, or by courier, or by certified or registered mail and shall be effective when received if sent and addressed as follows or to such other address as may be designated by a party in writing: If to Genentech: Genentech, Inc. 1 DNA Way South San Francisco, CA 94080 Attn: Corporate Secretary Fax: (650) 952-9881 If to Connetics: Connetics Corporation 3400 W. Bayshore Road Palo Alto, CA 94303 Attn: Chief Executive Officer Fax: (650) 843-2899 12.2 Amendments and Waivers (a) Any provision of this Agreement may be amended or waived prior to the Closing Dates if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by each party to this Agreement, or in the case of a waiver, by the party against whom the waiver is to be effective. (b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. 12.3 Expenses. Except as provided in Sections 3.4 and 3.5, all costs and expenses incurred in connection with this Agreement shall be paid by the party incurring such cost or expense. 12.4 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement, except that Genentech may assign this Agreement to an Affiliate, without the prior written consent of the other party. 12.5 Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of California, without regard to the conflicts of law rules of such state. 12.6 Counterparts; Third Party Beneficiaries. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. No provision of this Agreement is -22- 23 intended to confer upon any Person other than the parties hereto any rights or remedies hereunder. 12.7 Entire Agreement. This Agreement and the Transaction Agreements constitute the entire agreement between the parties with respect to the subject matter of this Agreement and supersedes all prior agreements and understandings, both oral and written, between the parties with respect to the subject matter of this Agreement, except for the Confidentiality Agreement between the parties dated January 9, 1997, which shall remain in full force and effect. No representation, inducement, promise, understanding, condition or warranty not set forth herein has been made or relied upon by either party hereto. [Signature Page Follows.] -23- 24 IN WITNESS WHEREOF, the parties have each caused this Agreement to be executed by their duly-authorized representatives as of the date first above written. GENENTECH, INC. By: /s/ Nicholas J. Simon ------------------------------- Name: Nicholas J. Simon ----------------------------- Title: Vice President, Business and ---------------------------- Corporate Development CONNETICS CORPORATION By: /s/ T. Wiggins ------------------------------- Name: Thomas Wiggins ----------------------------- Title: President/CEO ---------------------------- SIGNATURE PAGE TO STOCK ISSUANCE AGREEMENT EX-23.1 6 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-3 No. 333-00000) and related Prospectus of Connetics Corporation for the registration of 3,572,548 shares of its common stock and to the incorporation by reference therein of our report dated January 15, 1998, with respect to the financial statements of Connetics Corporation included in its Annual Report (Form 10-K) for the year ended December 31, 1997, filed with the Securities and Exchange Commission. Palo Alto, California /s/ ERNST & YOUNG LLP December 16, 1998 -----END PRIVACY-ENHANCED MESSAGE-----