10-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------- FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ---- ACT OF 1934 For the fiscal year ended December 31, 1994 ----------------- OR ____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number 0-11749 ------- SCIOS NOVA INC. ------------------------- (Exact name of registrant as specified in its charter) Delaware 95-3701481 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2450 Bayshore Parkway, Mountain View, California 94043-1173 ----------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (415) 966-1550 -------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value Class D Warrants to purchase Common Stock Contingent Payment Rights Common Share Purchase Rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The approximate aggregate market value of voting stock held by nonaffiliates of the registrant as of March 17, 1995 was $275,306,188. As of March 17, 1995, 35,446,030 shares of the registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENTS FORM 10-K PART --------- -------------- Definitive Proxy Statement with respect to III the 1995 Annual Meeting of Stockholders PART I ITEM 1. BUSINESS GENERAL Scios Nova Inc. ("Scios Nova" or the "Company") is a biopharmaceutical company engaged in the discovery, development, and commercialization of novel human therapeutics using its capabilities in both protein-based and small- molecule drug discovery and development. The Company focuses its proprietary research and development efforts on products to treat acute illnesses, primarily in the areas of cardio-renal disease and inflammation, and seeks to collaborate with corporate partners in the development of products to treat chronic diseases. The Company also has a marketing and sales organization selling third-party products that generate cash to help fund continued development of the Company's proprietary products, none of which to date has been developed to the commercialization stage. The Company funds the development of proprietary products that address acute illnesses, primarily in the areas of cardio-renal disease and inflammation, where it has significant product candidates, a strong competitive advantage and extensive technical expertise. The Company's lead products for acute conditions are AURICULIN [REGISTERED TRADEMARK] anaritide for the treatment of acute renal failure and NATRECOR [REGISTERED TRADEMARK] BNP for the treatment of acute congestive heart failure. In January 1995, the Company completed enrollment in a 500-patient Phase III clinical trial of AURICULIN for the treatment of acute renal failure. Following analysis of the results of this study the Company, together with Genentech, Inc., which recently entered into a collaboration with Scios Nova for AURICULIN, will determine the next appropriate development steps for the product. NATRECOR is currently in Phase II clinical studies for the treatment of acute congestive heart failure. The Company is also continuing preclinical studies of its anti-inflammatory compounds. Therapies for chronic conditions, including FIBLAST-TM- bFGF for wound healing, insulinotropin for Type II diabetes and a treatment for Alzheimer's disease, are being developed by corporate partners or by Scios Nova with funding from corporate partners. Under its arrangements with corporate partners, Scios Nova typically receives research and development funding, payments for clinical supplies and/or milestone payments for achieving scientific and clinical benchmarks. The Company is also entitled to royalties on commercial sales of products and, in some cases, may receive additional revenues from the manufacture of products. Scios Nova's financial strategy involves careful management of cash through targeted investment in its acute-care pipeline, while underwriting a portion of this investment with cash flow from its commercial operations, and generating corporate partner funding for chronic-care products under development. With an ability to develop its acute-care product pipeline, its ability to develop therapies for chronic illness under partner sponsorship, an expanding marketing and sales capability, and a strong financial base, Scios Nova is seeking to reach sustainable profitability by 1998. Scios Nova was formed through the September 1992 merger (the "Merger") of Scios Inc., a Delaware corporation ("Scios"), and Nova Pharmaceutical Corporation, a Delaware corporation ("Nova"). The Merger brought together Scios' expertise in producing recombinant proteins with Nova's expertise in synthesizing small molecules. As a result, Scios Nova has capabilities in molecular and cell biology, protein and medicinal chemistry, molecular modeling, pharmacology, and the bioprocessing sciences, and has the tools to undertake the rational design of small molecules based on knowledge of the associated design targets. In the Merger, the Company also acquired its sales force and a line of marketed psychiatric products. The Company was incorporated in California in 1981 under the name California Biotechnology Inc. and reincorporated in Delaware in 1988. The Company changed its name to Scios Inc. in February 1992 and to Scios Nova Inc. in September 1992 following the Merger. The principal executive offices of the Company are located at 2450 Bayshore Parkway, Mountain View, California 94043. The telephone number at that location is (415) 966-1550. 2 PRODUCT DEVELOPMENT ACTIVITIES The following table summarizes certain information concerning Scios Nova's principal products under development. The information in the table is qualified in its entirety by reference to the more detailed information concerning the Company's products that is set forth elsewhere in this report:
POTENTIAL APPLICATIONS/ DEVELOPER/CORPORATE PRODUCT INDICATIONS STATUS * PARTNER (TERRITORY) ------- ----------------------- --------- -------------------- ACUTE-CARE PRODUCTS: CARDIO-RENAL DISEASES AURICULIN [REGISTERED TRADEMARK] anaritide Acute renal failure Phase III clinical Scios Nova/Genentech NATRECOR [REGISTERED TRADEMARK] BNP Acute congestive Phase II clinical Scios Nova heart failure INFLAMMATION Bradykinin antagonists Inflammatory conditions Research Scios Nova Cell adhesion Inflammatory conditions Research Scios Nova inhibitors CHRONIC-CARE PRODUCTS: FIBLAST-TM- bFGF Dermal ulcers Phase III clinical Kaken (Asia) (in Japan) Amyloid precursor Alzheimer's disease Research Marion Merrell Dow protein (worldwide) Insulinotropin Type II diabetes Phase II clinical Pfizer (worldwide) Human lung surfactant Respiratory distress Preclinical Byk Gulden (Europe) syndrome ------------------------- * "Research" denotes work up to and including discovery research and initial production. "Preclinical" denotes studies in animal models necessary to support an application to the Food and Drug Administration ("FDA") and foreign health registration authorities to commence clinical testing in humans. Clinical trials for pharmaceutical products are conducted in three phases. In Phase I, studies are conducted to determine safety. In Phase II, studies are conducted to gain preliminary evidence as to the efficacy and dosages of the product. In Phase III, studies are conducted to provide sufficient data for the statistical proof of safety and efficacy, including dosing regimen. Phase III is the final stage of such clinical studies prior to the submission of an application for approval of a new drug or licensure of a biological product.
3 PRODUCT DEVELOPMENT ACTIVITIES Scios Nova focuses its product development efforts on proprietary therapeutics for acute illnesses, principally in the areas of cardio-renal disease and inflammation. The Company's success will depend on its ability to achieve scientific and technological advances and to translate such advances into reliable, commercially competitive products on a timely basis. As described below, Scios Nova's products are at various stages of research and development, and further development and testing will be required to determine their technical feasibility and commercial viability. The proposed development schedules for the Company's products may be affected by a variety of factors, including technological difficulties, proprietary technology of others, reliance on third parties for support and changes in governmental regulation, many of which will not be within the control of Scios Nova. Scios Nova's product development efforts are described below. PRODUCTS TO TREAT ACUTE ILLNESS CARDIO-RENAL DISEASES Scios Nova's two leading products, AURICULIN [REGISTERED TRADEMARK] anaritide and NATRECOR [REGISTERED TRADEMARK] BNP have resulted from the Company's program in natural human peptides that improve kidney and heart function. AURICULIN [REGISTERED TRADEMARK] ANARITIDE. In January 1995, the Company completed patient enrollment in its Phase III clinical study of AURICULIN for the treatment of acute renal (kidney) failure ("ARF"). The placebo-controlled double-blinded study involved 500 patients at over 60 centers. The primary clinical endpoint in the Phase III study is a reduction in the need for kidney dialysis in ARF patients. The study is also designed to evaluate AURICULIN's potential for decreasing mortality in such patients. ARF, a rapid and severe decrease in kidney function, has a number of causes, including toxic effects of certain medications or decreased blood flow to the kidneys, such as may occur in complicated surgery or after a traumatic injury. ARF affects approximately 160,000 patients annually in the United States, with a mortality rate averaging 50%. Currently there is no available therapy for ARF other than supportive care. Statistical analysis of the study will take several months to complete. Thereafter, the Company, along with its new partner for AURICULIN, Genentech, Inc. ("Genentech"), will determine the next appropriate steps based on the results of the study. If the Company and Genentech determine that the results of the Phase III study provide sufficiently compelling evidence of AURICULIN's safety and efficacy, the Company will proceed as rapidly as possible to prepare and submit a New Drug Application ("NDA") to the Food and Drug Administration ("FDA"). If the Company determines that a confirmatory study or studies are required, the Company plans to initiate the additional study(s) as soon as practical. It is also possible that the results of the recent study will not warrant any further development of AURICULIN. AURICULIN is a synthetic version of a human hormone, atrial natriuretic peptide ("ANP"), which is produced in the heart and has a range of biological activities known to be important in kidney and heart function, including increasing the elimination of water and salt from the body. ANP improves kidney function by increasing blood flow into the filtration units of the kidney and restricting blood outflow. On December 30, 1994, the Company entered into a Collaboration Agreement (the "Collaboration Agreement") with Genentech relating to the joint development and commercialization of AURICULIN for use in the treatment of ARF. The Collaboration Agreement provides for the parties' co-promotion of AURICULIN in the United States and Canada and gives Genentech exclusive marketing rights in countries other than the United States and Canada (the "Licensed Territory"). Scios Nova will receive royalties on sales in the Licensed Territory, a $30 million milestone payment upon receipt of U.S. regulatory approval, and additional payments of up to $20 million upon obtaining regulatory approvals and achieving certain sales levels in other designated markets. 4 The Company will bear the development costs of AURICULIN anaritide until the receipt of regulatory approval in North America. Thereafter, all costs of development and promotion within North America will be shared equally between the two parties. Genentech will bear all costs for development and promotion within the Licensed Territory. Genentech has the right to terminate the Collaboration Agreement within 30 days following receipt of the Phase III clinical results of AURICULIN. In addition, if the Company does not file an NDA for AURICULIN by December 31, 1997, or if, within 60 days of such filing, the FDA has not accepted for review an NDA which was filed by December 31, 1997, Genentech has the option of (i) electing to bring NATRECOR or another natriuretic peptide product under development by Scios Nova into the Collaboration Agreement for use in the treatment of ARF or (ii) terminating the Collaboration Agreement. This option could limit the Company's ability to enter into collaborative arrangements on NATRECOR or any other natriuretic peptide product until the expiration of such deadlines. If Genentech were to elect to bring a product into the Collaboration Agreement in place of AURICULIN, the milestone payments due with respect to such product would be reduced significantly. There can be no assurance that the Company will ever receive the requisite regulatory approvals to market AURICULIN or receive the milestone payments called for by the Collaboration Agreement. In addition, there can be no assurance that AURICULIN (or any other product developed under the Collaboration Agreement) will generate sufficient, if any, revenue (through milestone payments, sales, royalties, or otherwise) to offset the development and promotion costs incurred. Concurrent with the signing of the Collaboration Agreement, Genentech (i) made a $20 million equity investment in Scios Nova by purchasing a new class of nonvoting Preferred Stock and (ii) made a $30 million loan commitment, which the Company may draw against at any time through December 2002. See Note 3 of Notes to Consolidated Financial Statements. Scios Nova has received from the FDA Orphan Drug designation of AURICULIN in ARF. See "Business -- Government Regulation." In March 1994, the Company entered into a long-term supply agreement pursuant to which a third party will produce bulk form AURICULIN for Scios Nova via a synthetic process. See "Business -- Manufacturing." Scios Nova's scientists were among the first groups to clone the gene encoding human ANP, and the Company has produced the hormone synthetically and using recombinant DNA technology. Scios Nova has a worldwide, semi-exclusive license to patent rights of Merck & Co., Inc. ("Merck & Co."), including an issued U.S. patent covering the ANP product currently under development by Scios Nova. This license is royalty free in the United States. The patent licensed to Scios Nova was issued to Merck & Co. at the conclusion of an interference proceeding which also involved Scios Nova's patent application covering human ANP. The patent, which is due to expire in August 2007, allows the Company and Merck & Co. to prevent others from marketing Scios Nova's form of ANP in the United States. The Company also has an exclusive license under the ANP patent rights of Queens University. These patent rights include an issued European patent which covers numerous forms of ANP, including that being developed by the Company. This European patent terminates in December 2003. Scios Nova reacquired rights to AURICULIN from Wyeth-Ayerst Laboratories, a division of American Home Products Corporation ("AHP"), in 1989. As consideration for the reacquired rights, the Company made an initial payment to AHP and agreed to make additional payments out of amounts received by Scios Nova (exclusive of research and development funding) upon completion of licensing or other arrangements for the commercialization of AURICULIN. Approximately $3.8 million in milestone payments remains to be paid to AHP if AURICULIN is approved for marketing. Scios Nova's initial research on AURICULIN was funded by Biotechnology Research Partners, Ltd. ("BRP"). See Note 10 of Notes to Consolidated Financial Statements. NATRECOR [REGISTERED TRADEMARK] BNP. During 1994, Scios Nova conducted Phase I/II clinical studies of NATRECOR for the treatment of acute congestive heart failure ("CHF"). The results of the Phase I/II studies demonstrated significant improvements in key measures of heart function following treatment with NATRECOR. Based on these preliminary studies, in October 1994, the Company initiated a Phase II study for the treatment of acute CHF, which includes several dose-ranging and safety 5 studies and is expected to involve approximately 200 patients. Contingent on the results of these trials, Scios Nova hopes to begin Phase III efficacy studies of NATRECOR for acute CHF in 1996. Acute CHF affects over 700,000 people annually in the United States. Because the market for treatment of CHF is very competitive, the Company's success in commercializing NATRECOR will be particularly dependent not only on strong clinical data but on its ability to produce NATRECOR cost effectively. As a result, the Company is analyzing alternative methods of manufacturing NATRECOR. See "Business -- Manufacturing." The Company believes that it was the first to discover human brain natriuretic peptide ("BNP"), whose gene it cloned in 1988, as a part of its program in natural human peptides that improve heart and kidney function. Like ANP, BNP is made in the heart and preclinical studies at the Company and elsewhere suggest that BNP has biological effects similar to ANP in increasing the elimination of salt and water from the body, dilating blood vessels and decreasing the secretion of other hormones which lead to blood vessel constriction and elevated blood pressure. The Company has an issued U.S. patent covering human BNP, which has a term through May 2009. This and other U.S. patents issued to Scios Nova are subject to possible extension due to time taken up in the regulatory approval process. See "Patents and Proprietary Rights." TREATMENT OF INFLAMMATION The Company's inflammation program centers around two classes of anti- inflammatory agents -- bradykinin receptor antagonists and cell adhesion inhibitors. BRADYKININ ANTAGONIST PROJECT. Bradykinin antagonists act by blocking the binding of bradykinin to its receptor. Bradykinin is released from inactive precursor proteins during the inflammatory process and is a mediator of inflammation and pain in a variety of conditions, including asthma, sepsis, trauma and arthritis. First-generation bradykinin receptor antagonists were acquired by the Company through an exclusive licensing agreement. The Company subsequently developed second-generation bradykinin antagonists which, in experiments measuring the ability of agents to block the binding of bradykinin to its receptor sites, are substantially more potent than first generation agents. In 1994, the Company conducted preclinical studies of a lead compound, NPC 17731, in several disease models. The Company determined that the results of these studies were not sufficiently compelling to proceed to the clinic with the compound for the indication under evaluation. The Company is continuing to evaluate NPC 17731 and related compounds in other models of inflammatory disease. The Company has U.S. and foreign patents that have issued and applications pending, which cover the second-generation bradykinin antagonists it has identified. The bradykinin antagonist project was undertaken by Nova on behalf of Nova Technology Limited Partnership, a Delaware limited partnership ("NTLP"), that funded the research and development of certain projects by Nova. In December 1992, the Company exercised an option to acquire all of the limited partnership interests of NTLP in exchange for Common Stock and contingent royalty payments based on future product sales. The Company and its licensees remain obligated to fund further development of the products previously developed on behalf of NTLP (the bradykinin antagonist project and the drug delivery projects, which have been licensed to third parties), unless Scios Nova determines, in its reasonable judgment, that the products to be funded are not commercially viable and technically feasible from Scios Nova's perspective. See Note 2 of Notes to Consolidated Financial Statements. CELL ADHESION INHIBITORS PROJECT. Cell adhesion inhibitors are small- molecule compounds that inhibit certain white cells, called neutrophils, from adhering to cells that line blood vessels, an early step in the inflammatory process. Scios Nova has conducted early-stage clinical studies with a class of compounds called leumedins, primarily leumedin compound NPC 15669, that inhibit neutrophil adhesion. In 1993, the Company determined that the safety profile of NPC 15669 did not warrant further clinical development of the compound, and during 1994, the Company focused its research efforts in this area on development of second-generation compounds with an improved therapeutic profile. The Company has an issued U.S. patent and pending U.S. and foreign applications covering certain classes of cell adhesion inhibitor compounds of potential use in treating inflammatory conditions. 6 OTHER RESEARCH. The Company also conducts exploratory research from time to time on other agents and on new applications of agents under development by the Company for other indications. Two such projects are the Company's research exploring novel acute-care applications for serine protease inhibitors and for its FIBLAST-TM- bFGF. PRODUCTS TO TREAT CHRONIC ILLNESS The Company plans to continue the development of therapies for the treatment of chronic conditions primarily under the sponsorship of corporate partners. Continued funding and participation by the Company's corporate partners under joint development and licensing agreements will depend not only on the timely achievement of research and development objectives by the Company, which cannot be assured, but also on each corporate partner's own financial, competitive, marketing and strategic considerations. Under several of its joint development and license agreements, Scios Nova relies on its corporate partners to conduct preclinical and clinical trials, to obtain regulatory approvals and to manufacture and market products. Although the Company believes that its corporate partners will have an economic incentive to meet their contractual responsibilities, the amount and timing of resources devoted to these activities generally will be controlled by the corporate partner. TISSUE REPAIR FIBLAST-TM- bFGF. FIBLAST is Scios Nova's form of human basic fibroblast growth factor ("bFGF"), an agent that promotes angiogenesis (the growth of new blood vessels) and directly stimulates the growth of connective tissue, as well as the outer layer of skin. Since 1988, research and development of FIBLAST has been conducted by both Scios Nova and Kaken Pharmaceutical Co., Ltd., the Company's Japanese corporate partner ("Kaken"). Pursuant to a 1988 agreement, Kaken has exclusive rights to develop and market FIBLAST for all indications in Japan, Korea, Taiwan, Hong Kong and the People's Republic of China. The Company receives research and development support payments, is entitled to receive additional payments as regulatory milestones are met and will receive royalties on any sales of FIBLAST products. In 1994, the Company and Kaken signed a series of agreements expanding the 1988 agreement. Under the new agreements, Scios Nova will manufacture FIBLAST for the next several years for use by Kaken. The agreements also establish a manufacturing process development collaboration between the companies and provide Kaken with a license to Scios Nova's manufacturing technology for FIBLAST. It is intended that Kaken be able to manufacture FIBLAST for its own use in the future. Under the new agreements, Kaken will make payments to Scios Nova for the supply of material, the process development collaboration, and the license to FIBLAST manufacturing technology. Kaken is currently conducting two Phase III trials in Japan for evaluation of FIBLAST in recalcitrant wounds. Both studies began in late 1994 and will continue into late 1995. Following the Company's completion in 1993 of Phase II clinical trials of FIBLAST in the United States for the treatment of pressure sores and neuropathic ulcers, the Company determined not to fund additional clinical studies of FIBLAST for chronic illnesses, except under sponsorship of a corporate partner. This decision was driven by the cost of the extensive clinical trial program expected to be required for approval of such a product in the United States. To date, the Company has not entered into such a partnership and therefore the primary focus of Scios Nova's work continues to be supporting its Japanese partner, Kaken. Scios Nova is also conducting research on the use of FIBLAST for treatment of certain acute illnesses. See "Business -- Product Development Activities -- Products to Treat Acute Illness." The Company is obligated to make payments to Organon International ("Organon") based on amounts received by Scios Nova upon commercialization of FIBLAST. Approximately $1.9 million remains to be paid under the obligation, which stems from the Company's 1989 reacquisition of certain FIBLAST rights previously licensed to Organon. The basic research on FIBLAST was funded by Biotechnology Research Partners, Ltd. ("BRP"). See Note 8 of Notes to Consolidated Financial Statements. See also "Business -- Patents and Proprietary Rights" for a discussion of FIBLAST patent issues. 7 ALZHEIMER'S DISEASE Beta-AMYLOID PRECURSOR PROTEIN. In July 1992, Scios Nova formed a research alliance with Marion Merrell Dow, Inc., ("MMD") to jointly develop new therapies for Alzheimer's disease. The program is focusing on developing pharmaceuticals that prevent the formation of Beta-amyloid deposits in the brain. MMD will have exclusive worldwide rights to develop and market Alzheimer's drugs discovered by the alliance. MMD is funding the ongoing work at the Company and has established its own research team. As products advance into development and commercialization, the Company will receive substantial milestone payments and royalties. In February 1995, the Company was issued a U.S. patent covering transgenic mice that develop brain tissue deposits characteristic of those found in humans with Alzheimer's disease, which technology is the basis for the parties' collaboration. METABOLIC DISORDERS INSULINOTROPIN. Through its Metabolic Biosystems subsidiary, the Company developed insulinotropin in collaboration with Pfizer Inc ("Pfizer"), which is continuing Phase II clinical trials of insulinotropin for the treatment of Type II diabetes. Insulinotropin is a potent peptide that stimulates insulin release when blood sugar levels are above normal. Type II diabetics do not release enough insulin from the pancreas when blood glucose levels rise in response to eating a meal and become progressively more resistant to insulin action in stimulating glucose uptake by muscle and fat tissue. Insulinotropin controls blood glucose levels in Type II diabetics by stimulating insulin release and perhaps by overcoming insulin resistance. Present therapies for Type II diabetics include insulin injections and oral hypoglycemic agents, which can induce dangerously low blood sugar levels. Because insulinotropin stimulates insulin release only when blood sugar levels are above normal, it may have a lower risk of this serious side effect. The Company has produced insulinotropin synthetically and using recombinant DNA technology. The Company holds an exclusive license to patent applications covering insulinotropin held by Massachusetts General Hospital, which rights were licensed to Pfizer as part of the research collaboration. A U.S. patent licensed exclusively to the Company covers the form of insulinotropin being developed by Pfizer under license from the Company. The term of the patent extends through June 2009. An additional issued patent and a pending application cover other forms of insulinotropin. Under the parties' original collaboration agreement, Pfizer had the right to commercialize products on an exclusive, worldwide basis under a royalty- bearing license. In early 1994, Scios Nova and Pfizer amended the terms of their collaboration agreement. Scios Nova agreed to reduce future royalties and surrender co-marketing and manufacturing rights in exchange for the addition of product development milestone payments to Scios Nova. As a part of the amendment, Pfizer also terminated its rights to other technologies developed in the collaboration. ADDITIONAL PROJECTS The Company has from time to time pursued product development activities outside of the focus areas described above, some of which programs are discussed below. Scios Nova intends to divest or otherwise leverage technologies which it concludes are not central to its long-term business strategy. BNP DIAGNOSTIC. Third-party researchers have determined that the level of circulating BNP may be a good basis for a diagnostic to identify patients suffering from congestive heart failure. Scios Nova has licensed Shionogi and Co., Ltd. the right under the Company's patent position on BNP to develop diagnostic products for Japan. In 1994 Shionogi received Japanese regulatory approval to market a radioimmunoassay diagnostic kit employing the technology, and is expecting to begin marketing the kit in 1995. Scios Nova is now seeking to commercialize this application of its BNP patent rights in additional territories. CNS DISORDERS; GUILFORD PHARMACEUTICALS. In June 1994, the Company's majority-owned subsidiary, Guilford Pharmaceuticals Inc. ("Guilford"), completed an initial public offering of $15 million of common stock to pursue the development of pharmaceutical products for the treatment of diseases of the central nervous system. As a result of the 8 offering, Scios Nova's ownership interest in Guilford was reduced to approximately 29%. Scios Nova had previously transferred to Guilford certain neuroscience technology originally developed by Nova and had licensed to Guilford the GLIADEL [REGISTERED TRADEMARK] implant project and related drug delivery technology described below for application in the treatment of tumors of the central nervous system and cerebral edema ("Guilford Field"). DRUG DELIVERY SYSTEMS. Prior to the Merger, Nova had been developing certain drug delivery systems. Its two most advanced projects were the GLIADEL implant to treat primary brain cancer, for which Phase III studies had been completed, and the SEPTACIN [REGISTERED TRADEMARK] implant for the treatment of osteomyelitis, a serious bone infection. These projects were developed pursuant to a license agreement with the Massachusetts Institute of Technology ("MIT") relating to MIT's BIODEL [REGISTERED TRADEMARK] drug delivery technology. As noted above, the Company licensed a portion of the drug delivery technology to Guilford. In 1994, the Company licensed to another third party the drug delivery technology, including SEPTACIN, for all uses outside the Guilford Field. Scios Nova thereafter assigned its BIODEL license rights back to MIT, which will administer these licenses. The Company and MIT will receive royalty and milestone payments under the license agreements with Guilford and the second licensee as products are developed. The licensees are also obligated to meet certain diligence standards in pursuing development of their respective product candidates. The GLIADEL and SEPTACIN projects were undertaken by the Company on behalf of NTLP. HUMAN LUNG SURFACTANT ("hLS"). The Company holds rights in several issued patents on the protein components of lung surfactant based on its own work and under an assignment of patents and patent applications owned by Children's Hospital Medical Center of Cincinnati. Lung surfactant may have therapeutic value in infant and adult respiratory distress syndromes and other respiratory disorders. In late 1992, the Company reacquired all rights to the recombinant hLS technology that had previously been licensed to Genentech, and the Company continues to seek a partner to develop and market hLS outside of Europe. The Company previously granted Byk Gulden Pharmazeutika, exclusive European marketing rights for hLS. MARKETING AND SALES The Company intends eventually to sell certain of its proprietary products through its own sales force for some or all approved indications. Presently, Scios Nova generates operating profits by marketing products that were developed by others. THIRD-PARTY PRODUCTS. The Company has a sales force of approximately 80 representatives who are employed exclusively by the Company and work on a part- time basis marketing psychiatric products. The Company currently markets in the United States four psychiatric products under license from SmithKline Beecham Corporation ("SB") and co-promotes a fifth product distributed by McNeil Pharmaceutical ("McNeil"), an affiliate of Johnson & Johnson. Since 1993, the Company has jointly promoted with McNeil HALDOL [REGISTERED TRADEMARK] Decanoate (haloperidol) for the treatment of schizophrenia. Under the agreement, the Company receives quarterly payments based on total sales of the product. McNeil manufactures and distributes HALDOL Decanoate, and generally indemnifies Scios Nova against product liability claims. The five-year agreement may be extended up to an additional three years upon the attainment of revenue goals. The Company has exclusive rights to market the following SB Products in the United States: THORAZINE [REGISTERED TRADEMARK] (chlorpromazine) and STELAZINE [REGISTERED TRADEMARK] (trifluoperazine) for the treatment of schizophrenia, ESKALITH [REGISTERED TRADEMARK]/ESKALITH CR [REGISTERED TRADEMARK] (lithium) for the treatment of manic depressive illness and PARNATE [REGISTERED] TRADEMARK] (tranylcypromine) for the treatment of depression (collectively the "SB Products"). SB currently manufactures and distributes the SB Products. SB may discontinue manufacturing one or more of the products if it gives the Company at least 12 months' notice, in which case Scios Nova has the right to manufacture such product(s). SB is responsible for all ancillary matters relating to sales of the SB Products (including various administrative tasks), for the maintenance in good standing of all new drug applications with respect to the SB Products, and for the maintenance of product liability insurance with respect to the SB Products. The agreement also grants Scios Nova certain rights to indemnification from SB for product liability claims. The Company is obligated to spend certain amounts for marketing support based on the prior year's net sales and to reimburse SB for certain third- 9 party royalty payments. Scios Nova pays SB 40% of the Company's net profits, as defined, from U.S. sales of the SB Products. See Note 3 of Notes to Consolidated Financial Statements. The SB Products have a well-established reputation; however, unit volume for certain products has been eroding and can be expected to continue to erode due to competition from generic products sold at substantially lower prices. Although past decreases in unit sales have been partially offset by price increases there can be no assurance that the market will accept any additional price increases. Among the SB Products the Company has placed particular marketing emphasis on those product formulations, such as ESKALITH CR (a controlled release formulation), where no generic equivalents are available. Scios Nova plans to acquire or license from third parties additional products that can be promoted by the Company's sales force. The Company will consider not only additional psychiatric products, but also products in other therapeutic areas. Although the Company is actively seeking to acquire such product rights, there can be no assurances that they will be available on terms favorable to the Company or at all. PROPRIETARY PRODUCTS. Scios Nova believes that its experience in marketing third-party products under arrangements such as those described above will prove useful when it prepares to market its own products. However, to date, Scios Nova's marketing experience has been limited to psychiatric products, and the Company does not currently have the resources to market certain products it is seeking to develop. The commercialization of the Company's major products will require significant financial resources as well as worldwide sales, marketing and distribution capabilities. In order to provide funds and expertise to meet these requirements, the Company will consider entering into additional corporate partnerships with established pharmaceutical companies, as it has with Genentech for the co-promotion of AURICULIN. See "Business -- Product Development Activities -- Products to Treat Acute Illness." There can be no assurance that the Company will be able to enter into such partnerships on favorable terms or develop such a marketing capability on its own. Scios Nova believes that such collaborations may enable it to speed the timing of product launch and increase market penetration of selected new therapies. However, such a partnering arrangement could also result in a lower level of income to Scios Nova than if it marketed the products entirely on its own. The Company's ability to commercialize its products successfully may depend in part on the extent to which reimbursement for the cost of such products and related treatment will be available from government health administration authorities, private health coverage insurers, and other organizations. Government and other third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for new therapeutic products, and market acceptance of Scios Nova products would be adversely affected if adequate coverage and reimbursement levels are not provided for uses of Company products. In addition, in view of expressed governmental concerns over drug prices and other healthcare costs, there can be no assurance that future government and private cost control initiatives will not adversely affect the Company's ability to maintain price levels on its products sufficient to realize an appropriate return on development efforts. MANUFACTURING Scios Nova has concentrated its resources on product discovery and development prior to investing substantially in manufacturing capability. To date, the Company has produced only FIBLAST in limited quantities sufficient for clinical trials and relies on third parties for the manufacture of other products, including AURICULIN and NATRECOR. Scios Nova has a production facility which it believes enables it to produce FIBLAST and potentially other products for itself and others under requirements for current Good Manufacturing Practices ("cGMP"). The Company does not currently possess the staff or facilities necessary to manufacture any product in the commercial quantities which may be required in the long term. The strategy of building or acquiring commercial-scale manufacturing facilities or utilizing third-party facilities only as the need arises carries with it certain risks, as there can be no assurance that such facilities can be built, acquired or used on commercially acceptable terms or that Scios Nova will be able to meet manufacturing quantity and quality requirements through the use of such arrangements. AURICULIN is currently produced by third-party manufacturers under contract to Scios Nova. The Company has a long-term agreement for the supply of AURICULIN in bulk form, and has fill and finish services performed by another third 10 party. The Company believes that it would not be cost-effective to qualify alternate suppliers at this time. However, an inability of either the Company's bulk or fill and finish manufacturer to provide material to Scios Nova on a timely basis would cause delays in supply which could have a material adverse effect on the Company's business. To date the Company has also engaged third parties to manufacture clinical supplies of NATRECOR via a synthetic process. The Company is currently reviewing its alternatives with respect to the long- term production of NATRECOR, including whether to manufacture the product recombinantly or synthetically and whether to do so itself or through third parties. If Scios Nova elects to manufacture NATRECOR itself over the long term, it will need to build or acquire substantial additional manufacturing capacity. To the extent Scios Nova may from time to time have capacity available in its production facility, it intends to pursue opportunities to perform contract manufacturing for third parties. In 1994, the Company produced material for a third-party customer under its first such arrangement, and in early 1995, the Company entered into a second agreement to provide manufacturing services for another party. McNeil manufactures HALDOL Decanoate, and SB manufactures the SB Products. If SB were to discontinue manufacturing the SB Products and the Company wished to continue selling the products, it would have to develop additional facilities to manufacture independently on a large scale or enter into an arrangement with a third party to manufacture such products. See "Business -- Marketing and Sales." PATENTS AND PROPRIETARY RIGHTS Scios Nova is seeking patent protection for proprietary technology and products in the United States and abroad to prevent others from unfairly capitalizing on its investment in research. Other companies engaged in research and development of new health care products based on biotechnology also are actively pursuing patents for their technologies, which they consider to be novel and patentable. Scios Nova also relies and will continue to rely upon trade secrets and know-how to develop and maintain its competitive position. There can be no assurance, however, that others will not develop similar technology or that confidentiality agreements on which the Company relies to protect trade secrets will be honored. The Company currently owns or holds exclusive rights to over 50 issued U.S. patents and 40 U.S. patent applications pending covering its proprietary technology and products. The Company also files foreign applications corresponding to most of its U.S. applications. Scios Nova's issued patents include patents on AURICULIN, NATRECOR, bradykinin antagonists, insulinotropin, cell adhesion inhibitors, and lung surfactant proteins. The Company's patent position with respect to certain principal products under development is described above. See "Business -- Product Development Activities." If a patent issues prior to marketing approval, as has been the case with all of the Company's issued patents to date, Scios Nova can apply for extension of the patent term for a limited period of time to make up for a portion of the patent term lost to the regulatory period. The actual period of the extension varies but generally cannot exceed five years. In certain of its third-party agreements, the absence of a patent covering a product licensed by Scios Nova could reduce the royalties due to the Company under the agreements. The patent position of biotechnology and pharmaceutical firms generally is highly uncertain and involves complex legal and factual questions. Although Scios Nova believes it has strong patent positions on certain of its products, there can be no assurance that any patent will issue on pending applications of the Company, or that any patent issued will afford the Company significant commercial protection against competitors for the technology or product covered by it, or that patents will not be infringed upon or designed around. Third parties have filed applications for, or have been issued patents relating to, products or processes which are similar to or competitive with certain of the Company's products or processes. Scios Nova is incurring and expects to continue to incur substantial costs in interference proceedings and in defending the validity or scope of its patents or in challenging the validity or scope of competing patents. The Company is unable to predict how the courts will resolve issues relating to the validity and scope of such patents, and if any such patent were to be interpreted to cover any of the Company's products and could not be licensed, circumvented or shown to be invalid, the results of Scios Nova's future operations could be materially and adversely affected. Described below are patent positions of other 11 companies of which Scios Nova is aware that potentially overlap the Company's principal research and product development areas discussed above. AURICULIN. On June 14, 1988, a U.S. patent issued to Organogen Medizinisch-Molekularbiologische Forsuchungsgesellschaft m.b.H. containing claims to biologically active fragments of cardiodilatin, a natriuretic peptide precursor. Scios Nova believes that the claims of the patent may not reasonably be construed to cover the form of ANP being developed by Scios Nova and, to the extent any claims of the patent may be interpreted to cover AURICULIN, reasonable grounds exist for asserting the invalidity of such claims. If any claims of this patent were determined to be valid and construed to cover the form of ANP being developed by Scios Nova, Scios Nova's ability to develop AURICULIN commercially might be hindered or prevented if it were unable to obtain a license. A corresponding patent has been issued by the European Patent Office. This patent is currently involved in an opposition proceeding in Europe. NATRECOR. Scios Nova has a U.S. patent covering human BNP, which issued in 1992. Scios Nova is aware that Daiichi Pharmaceutical Co., Ltd., Tokyo ("Daiichi") has filed patent applications on porcine BNP in Japan and on human BNP worldwide. The filing dates of the Daiichi applications covering human BNP are later than those of the Company; however, there can be no assurance that Daiichi will not obtain separate patents on BNP in some countries that could be interpreted to cover Scios Nova products. FIBLAST. In February 1991, a U.S. patent with one claim covering a form of FGF protein was issued to Synergen, Inc. ("Synergen"), which was recently acquired by Amgen Inc. In June 1991, a U.S. patent with one claim covering the DNA for the same form of FGF was issued to Synergen. Based on a review of the publicly-available documents relating to these patents, Scios Nova believes that the Synergen form of FGF or DNA differs from the form of FGF produced by the Company. Scios Nova filed its own patent applications covering FGF and DNA for FGF prior to the filing by Synergen of its application. Scios Nova received notice from the U.S. Patent and Trademark Office ("PTO") that its claims covering DNA for human basic FGF were allowable, subject to the outcome of a patent interference proceeding with the Salk Institute for Biological Studies ("Salk"). On October 22, 1993, the PTO Board of Appeals and Interferences ruled in the proceeding that Scios Nova is entitled to a patent containing claims covering DNA sequences encoding human basic FGF. Salk has not appealed the ruling and Scios Nova's application has been returned to the patent examiner for further administrative processing. In October 1992, a U.S. patent was issued to Salk which contains claims directed to substantially pure mammalian basic FGF containing the 146 amino acid sequence of bovine basic FGF or a naturally occurring homologous sequence of another mammalian species. If any claim of this patent were determined to be valid and construed to cover Scios Nova's human basic FGF, the Company's ability to develop basic FGF might be hindered or prevented if it were unable to obtain a license. Scios Nova's outside counsel has reviewed the publicly available documents relating to the Salk patent. Based upon this review, such counsel has opined that, to the extent any claims of the patent may be interpreted to cover human basic FGF, such claims are overly broad and would likely be held invalid by an informed court. In May 1994, the European Patent Office issued European Patent No. 0 248 819 to Scios Nova covering recombinantly-produced human bFGF. An opposition proceeding has been instituted against this patent by Chiron Corp. and Pharmacia S.p.A. The opposition proceeding is currently at a preliminary stage. In August 1994, the European Patent Office issued European Patent No. 0 228 449 to Salk covering the 146 amino acid sequence of bovine basic FGF or an equivalent or analog thereof. The Company may file an opposition to this patent at any time until May 31, 1995. The results of such opposition proceedings cannot be predicted with certainty. In March 1994, the Company obtained a non-exclusive license to make, use and sell its FIBLAST under a U.S. patent issued to Harvard University containing claims to purified cationic (basic) FGF. The Harvard patent is based on a patent application having a filing date earlier than the application which formed the basis for the Salk patent. TRADEMARKS. AURICULIN [REGISTERED TRADEMARK] and NATRECOR [REGISTERED] TRADEMARK] are registered trademarks of Scios Nova and FIBLAST-TM- is a trademark of Scios Nova. THORAZINE [REGISTERED TRADEMARK], STELAZINE [REGISTERED TRADEMARK], ESKALITH [REGISTERED TRADEMARK], ESKALITH CR [REGISTERED TRADEMARK] and PARNATE [REGISTERED TRADEMARK] are registered trademarks of SB. HALDOL [REGISTERED TRADEMARK] is a registered trademark of McNeilab, Inc. 12 COMPETITION Competition is intense in the development of biopharmaceutical products, particularly in the development of products through the application of biotechnology. There are numerous companies and academic research groups throughout the world engaged in similar research and development. Some of the Company's competitors, including some of its licensees, are working on products similar to those being developed by Scios Nova, including products in some of the Company's major product areas. Many of these companies have substantially greater financial, marketing, and human resources than Scios Nova. With respect to AURICULIN, Scios Nova is not aware of any currently marketed treatment for ARF but believes other companies are attempting to develop forms of natriuretic peptides for indications similar to that being pursued by Scios Nova. In the case of NATRECOR, a number of products are already marketed for the treatment of acute CHF. Hence, the Company will need to demonstrate strong clinical results and an ability to produce NATRECOR cost effectively in order to introduce NATRECOR into this competitive market. There can be no assurance that technological developments or superior marketing capabilities possessed by competitors will not materially adversely affect the commercial potential of the Company's products. In addition, if the Company commences significant commercial sales of products, manufacturing efficiency and marketing capability are likely to be significant competitive factors. With respect to products no longer covered by patents, such as the SB Products, Scios Nova faces competition from companies offering generic products. The Company believes that the competitive success of the Company will be based primarily on scientific and technological superiority, managerial competence in identifying and pursuing opportunities, operational competence in developing, protecting, producing and marketing products, and obtaining timely regulatory agency approvals and adequate funds. Achieving success in these areas will depend on the Company's ability to attract and retain skilled and experienced personnel, to develop and secure the rights to advanced proprietary technology and to exploit commercially its technology prior to the development of competitive products by others. Scios Nova expects that there will be continued competition for highly qualified scientific, technical, and managerial personnel. GOVERNMENT REGULATION The Company's research and development activities and, as for all companies developing pharmaceuticals, the production and marketing of its products, are subject to regulation for safety and efficacy by numerous governmental authorities in the United States and other countries. This regulation is a significant factor in the production and marketing of the products resulting from Scios Nova's research and development activities. Testing, production and marketing of pharmaceutical products for human use require approval of the FDA and comparable authorities in other countries. Over the next several years, Scios Nova will be increasing substantially its internal resources and expenditures to meet these requirements for the products it is developing. The procedure for seeking and obtaining the required governmental approvals for a new product involves many steps, including animal testing to determine safety and potential toxicity. In addition, extensive clinical testing is required to be conducted in humans to demonstrate the efficacy, optimal dose and safety of each product. The time and expense required to perform clinical testing can far exceed the time and expense of developing the product prior to clinical testing. Whether undertaken by the Company or its commercial partners, the process of seeking and obtaining these approvals for a new product is likely to take a number of years and involves the expenditure of substantial resources. Some of the Company's products will be treated by the FDA as biologics, which require marketing approval from the FDA for both the product and the manufacturing facility. There can be no assurance that any of the Company's products will obtain the necessary approvals on a timely basis, if at all. Even after initial FDA approval has been obtained, further studies may be required to provide additional data on safety or to gain approval for the use of a product as a treatment for clinical indications other than those initially targeted. Moreover, the FDA may reconsider its approval of any product at any time and may withdraw such approval. In addition, before the Company's products can be marketed in foreign countries, they are subject to regulatory approval in such countries similar to that required in the United States. Except for the continued marketing of the psychiatric products 13 produced by third parties, marketing approval of the Company's first human therapeutic product is not expected before 1997 at the earliest, and significant income will not be generated by the Company until after such approval is obtained. The Orphan Drug Act currently provides incentives to manufacturers to develop and market drugs for rare diseases or conditions affecting fewer than 200,000 persons in the United States at the time of application for orphan drug designation. A drug that receives orphan drug designation and is the first product to receive FDA marketing approval for its product claim is entitled to a seven-year exclusive marketing period in the United States for that product claim. However, a drug that is considered by the FDA to be different from a particular orphan drug is not barred from sale in the United States during the seven-year exclusive marketing period. The Company has received from the FDA orphan drug designation of AURICULIN in ARF and for hLS in infant respiratory distress syndrome. Various amendments of the Orphan Drug Act have been considered by Congress from time to time, some of which could reduce the benefits of orphan drug status to Scios Nova, if passed. FDA regulations require that any drug to be tested in humans must be manufactured according to cGMP regulations. This has been extended to include drugs that will be tested for safety in animals, in support of human testing. The cGMPs set certain minimum requirements for procedures, record-keeping and the physical characteristics of the laboratories used in the production of these drugs. In addition, various federal, state and local laws and regulations relating to safe working conditions, laboratory practices, the experimental use of animals and the storage, use, and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with the Company's research work are or may be applicable to such activities. They include, among others, the United States Atomic Energy Act, the Clean Air Act, the Clean Water Act, the Occupational Safety and Health Act, the National Environmental Policy Act, the Toxic Substances Control Act, and the Resource Conservation and Recovery Act, national restrictions on technology transfer, import, export and customs regulations, and other present and possible future federal, state, and local regulations. Although the Company believes that its safety procedures for handling and disposing of hazardous materials comply with prescribed regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. The Company may also incur substantial costs to comply with environmental regulations if the Company develops additional manufacturing capacity or otherwise changes its operations. For example, in connection with the closure of its Baltimore research and development facility in 1994 to consolidate such activities at its Mountain View headquarters, the Company incurred costs of approximately $370,000 for chemical disposal, storage and related costs. EMPLOYEES The Company had 283 full-time employees as of December 31, 1994, of which 148 were engaged in research, product and clinical development. The Company also had 81 part-time employees (primarily its sales force) at December 31, 1994. ITEM 2. PROPERTIES The Company's headquarters facility in Mountain View, California consists of three buildings owned by the Company and land occupied under a long-term ground lease. The ground lease rates are fixed through July 1997. Future minimum ground lease payments over the next three years total approximately $474,000. The three buildings represent 98,000 square feet of office and laboratory space. The Company presently occupies 68,000 square feet and leases the remaining space. The Mountain View facility includes a 13,000 square foot combination process and product development and biological testing facility in which Scios Nova has produced bulk and clinical supplies of FIBLAST. The Company expended approximately $3.2 million in capital expenditures in 1994 and anticipates spending approximately $5 million in capital expenditures in 1995. In 1994, the Company also occupied under lease a total of 57,428 square feet of administrative and laboratory facilities in Baltimore, Maryland (the "Holabird Facility") pursuant to a lease due to expire in 1997. Total rental payments for the Holabird Facility in 1994 were approximately $324,000. In 1994, the Company consolidated its research and development activities at the Holabird Facility with those in Mountain View, California. As a result the Company laid off certain employees, transferred others to Mountain View and, in early 1995, moved its Baltimore commercial operations and clinical groups, previously located at the Holabird Facility, to a new site in downtown Baltimore. In February 1995, Scios Nova purchased the Holabird 14 Facility for $3,000,000 pursuant to an option contained in the lease and also received assignment of the underlying ground lease, which has term through 2012. During 1995, the Company will attempt to secure one or more tenants for the facility and/or sell the facility. The commercial operations group and certain clinical employees now occupy 7,070 square feet under a five-year lease in Baltimore's Inner Harbor area. The Company's annual lease payments at this facility are approximately $106,000. ITEM 3. LEGAL PROCEEDINGS The Company is not currently a party to any material legal proceeding. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. MANAGEMENT EXECUTIVE OFFICERS The executive officers of the Company and their ages at March 17, 1995 are as follows:
NAME AGE POSITION ---- --- -------- Richard L. Casey 48 Chairman of the Board, President and Chief Executive Officer Thomas L. Feldman 44 Vice President of Commercial Operations Elliott B. Grossbard, M.D. 47 Vice President of Medical and Regulatory Affairs John A. Lewicki, Ph.D 43 Vice President of Research Arlene M. Morris 43 Vice President of Business Development John H. Newman 44 Vice President of Legal Affairs, General Counsel and Secretary Armin H. Ramel, Ph.D 69 Vice President of Product Development W. Virginia Walker 50 Vice President of Finance and Administration
Mr. Casey is Chairman of the Board, President and Chief Executive Officer of Scios Nova. He joined Scios Nova in December 1987 as President and Chief Executive Officer, and has served as a Director since that time. Mr. Casey was elected Chairman of the Board in November 1992. From early 1985 to 1987, he was with ALZA Corporation as Executive Vice President and President of ALZA Pharmaceuticals. From 1976 to 1985, he worked for Syntex Corporation. He joined Syntex Laboratories in 1976 as a manager and became director of marketing research in the following year. In 1979, he was named director of sales, in 1981 was promoted to vice president and in 1983 was appointed general manager of Syntex 15 Medical Diagnostics. Mr. Casey began his career in pharmaceuticals as a sales representative for Eli Lilly and Company. From 1968 to 1970, Mr. Casey served in the U.S. Peace Corps in Ethiopia. Mr. Casey serves on the boards of Guilford, Karo Bio AB, an affiliated Swedish biotechnology company, and VIVUS Inc., a publicly-traded medical devices company located in Menlo Park, California. Mr. Feldman joined Scios Nova in January 1995 as Vice President of Commercial Operations. Prior to joining the Company, Mr. Feldman was responsible for sales and marketing activities in two pharmaceutical companies affiliated with Johnson & Johnson. From 1993 through 1994, Mr. Feldman was National Sales Manager at Ortho Pharmaceutical Corporation. From 1973 to 1993, Mr. Feldman held various sales and marketing positions at McNeil Pharmaceutical, where he most recently served as National Sales Manager from 1990 to 1993. Dr. Grossbard joined Scios Nova in 1991 as Vice President of Medical and Regulatory Affairs. Immediately prior to joining Scios Nova, he was Vice President of Medical Affairs for HemaGen/PFC, a privately-held company developing perfluorocarbon products for oxygen transport and as blood substitutes. From 1982 to 1990, he was Associate Director and later Director of Clinical Research for Genentech, in charge of the clinical development of Alteplase (TPA). From 1978 to 1980, as an Assistant Attending Physician at Memorial Hospital and Assistant Professor of Medicine at Cornell Medical School, he helped to establish the Bone Marrow Transplant Service at Memorial Hospital. He received his M.D. from the Columbia College of Physicians and Surgeons in 1973, trained in internal medicine at Massachusetts General Hospital in Boston and received subspecialty training in hematology at the Columbia-Presbyterian Medical Center and the Memorial Sloan-Kettering Cancer Center in New York. Dr. Lewicki joined Scios Nova in 1983 as a Scientist, became Senior Scientist in 1984, Vice President, Research in August 1986, Vice President and Deputy Director, Research in March 1987 and Vice President and Director of Research in February 1988. Dr. Lewicki received his Ph.D. in Physiology/Pharmacology from the University of California, San Diego in 1979. From 1979 to 1981, Dr. Lewicki conducted postdoctoral research at the University of Virginia, Department of Internal Medicine and, from 1981 to 1983, he was a research pharmacologist at Stanford University, Division of Clinical Pharmacology. Mrs. Morris joined the Company in April 1993 as Vice President of Business Development. From 1989 until joining Scios Nova, Mrs. Morris served as Vice President of Business Development at McNeil Pharmaceutical, an affiliate of Johnson & Johnson, where she was responsible for licensing and new product development. From 1977 to 1989, Mrs. Morris held various sales and marketing positions at McNeil. Mrs. Morris began her career in pharmaceuticals as a sales representative for Syntex Corporation. Mr. Newman became Vice President, General Counsel and Secretary of Scios Nova in June 1983, Vice President of Commercial Development, General Counsel and Secretary in December 1989 and Vice President of Legal Affairs, General Counsel and Secretary in March 1992. Prior to joining Scios Nova, Mr. Newman was an attorney in private practice. Mr. Newman serves on the board of Guilford. Dr. Ramel joined the Company in July 1993 as Vice President of Product Development. Prior to joining Scios Nova, Dr. Ramel spent eleven years at Genentech, most recently as Senior Director of Process Sciences, which consisted of three departments: Cell Culture and Fermentation, Product Recovery, and Pharmaceutical R&D. Prior to joining Genentech, he was Director of the Biopolymer Research Department at Hoffmann-La Roche. He held academic positions at the University of Basel, Switzerland, SUNY at Buffalo and Boston University Medical School, and was a postdoctoral fellow at UC Berkeley's Biochemistry and Virus Laboratory. In addition, he was an NIH fellow for two years. Dr. Ramel holds a Ph.D. in Physical Chemistry from the University of Basel. He serves on the board of Sepragen Corporation, a publicly-held manufacturer of bioprocessing equipment used in the production of biopharmaceuticals. Mrs. Walker became Vice President of Finance of Scios Nova in April 1986, having served as Controller of Scios Nova since February 1985, and Vice President of Finance and Administration in March 1992. Prior to joining Scios Nova, she was Controller for Intersil, Inc., at that time a subsidiary of General Electric Company, from June 1983 to January 1985 and for more than five years before that directed various accounting units of Intersil, Inc. 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock and Class D Warrants are traded on the Nasdaq National Market System under the symbols SCIO and SCIOZ, respectively. The tables below set forth the high and low sales prices as reported by Nasdaq for the Common Stock and the Class D Warrants during the last two fiscal years. No cash dividends have been paid on Common Stock, and the Company does not anticipate paying cash dividends in the foreseeable future. As of December 31, 1994, there were approximately 7,900 stockholders of record of the Company's Common Stock.
Common Stock ------------ FY 1994 FY 1993 ------- ------- High Low High Low ---- --- ---- --- Q1 11-1/8 7-1/8 10-1/2 5-7/8 Q2 8-1/8 5-1/4 7 5-1/4 Q3 8-1/2 5-1/2 7-3/4 5-3/8 Q4 7-5/8 4-3/4 13-7/8 7-1/4 Year 11-1/8 4-3/4 13-7/8 5-1/4
Class D Warrants ---------------- FY 1994 FY 1993 ------ ------- High Low High Low ---- --- ---- --- Q1 3-5/8 2-1/4 4-1/4 1-3/4 Q2 2-3/4 1-1/2 2-5/8 1-1/2 Q3 2-3/4 1-7/8 2-5/8 1-3/4 Q4 3 1-3/4 5-3/4 1-3/4 Year 3-5/8 1-1/2 5-3/4 1-1/2
17 ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except share data) Year Ended December 31 1994 1993 1992* 1991 1990 ---- ---- ----- ---- ---- Revenues $53,667 $ 47,568 $ 25,085 $ 7,357 $12,425 Loss from operations (31,719) (43,237) (138,703) (21,189) (8,398) Other income 4,045 6,298 7,338 5,536 3,281 Net loss (27,961) (36,579) (131,946) (17,251) ** (5,131) Net loss per common share (0.79) (1.05) (5.76) (1.18) (0.44) Cash and securities 104,439 108,271 134,660 126,680 32,448 Working capital 38,942 96,334 42,842 93,417 15,620 Total assets 146,096 151,278 182,398 160,972 62,911 Long-term obligations 1,739 2,323 401 -- -- Stockholders' equity 126,438 135,299 169,144 156,092 60,078 Employees at year end 283 337 382 167 153 ------------------------- * Includes Nova Pharmaceutical Corporation and Nova Technology Limited Partnership from the dates of their acquisition, September 3, 1992 and December 31, 1992, respectively, as well as related charges for in-process technologies totaling $108.0 million. ** Includes a $6.2 million charge related to the purchase of minority interests in a subsidiary, Metabolic Biosystems Inc.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On September 3, 1992, Nova was merged into Scios and the combined company was renamed Scios Nova Inc. The results of operations of Nova are included with Scios with effect from the date of the merger and the Company's balance sheets at December 31, 1992 reflect the inclusion of Nova's assets and liabilities adjusted to fair value at the merger date. The acquisition was accounted for under the purchase method of accounting. The excess of the purchase price over the fair value of the acquired assets was allocated to in-process technology and was written off, resulting in a one-time non-cash charge to operations of $87.5 million. In December 1992, the Company exercised an option to purchase all limited partnership interests in the Nova Technology Limited Partnership ("NTLP"). The acquisition of the partnership interests, paid in shares of Scios Nova common stock, resulted in a one-time $20.5 million non-cash charge to operations. OPERATING RESULTS (1994, 1993 AND 1992) Total revenues were $53.7 million in 1994, $47.6 million in 1993 and $25.1 million in 1992. The increase in 1994 over 1993 was principally due to higher contract revenues and an increase in co-promotion commissions earned under the Company's agreement with McNeil Pharmaceutical ("McNeil"), an affiliate of Johnson & Johnson, for the co-promotion of McNeil's psychiatric product HALDOL[REGISTERED TRADEMARK] Decanoate. Co-promotion commissions were earned over a twelve-month period in 1994 versus a five-month period in 1993. The 1993 revenue increase over 1992 was principally due to sales of certain psychiatric products (the "SB Products") under license from SmithKline Beecham Corporation ("SB"), which are included for twelve months in 1993 and four months in 1992. Revenue from product sales (SB Products) was $42.8 million, $43.6 million and $17.3 million in 1994, 1993 and 1992, respectively. Product sales declined 2% from 1993 to 1994. The decrease was due to a drop in unit sales as a result of generic competition, partially offset by a 1994 price increase. The 1993 product sales increase over 1992 resulted from inclusion of twelve months of sales in 1993 versus only four months in 1992. Revenue from research and development contracts was $7.1 million, $3.5 million and $7.7 million in 1994, 1993 and 1992, respectively. The increase in contract revenue from 1993 to 1994 was principally due to payments from Pfizer Inc associated with the renegotiation of the contract for 18 the development of insulinotropin and from Kaken Pharmaceutical Co., Ltd. ("Kaken") for the licensing of the Company's FIBLAST[REGISTERED TRADEMARK] bFGF manufacturing technology and initiation of Phase III clinical trials in Japan. The decrease in contract revenue from 1992 to 1993 was principally due to the cessation of funding under the Company's agreements with Pfizer, NTLP and E. Merck and receipt in 1992 of milestone payments under the collaboration with Marion Merrell Dow Inc. to study Alzheimer's disease. Revenues under the collaboration with Marion Merrell Dow comprised approximately 26% and 49% of contract revenue in 1994 and 1993, respectively, while revenues under the collaboration with Kaken were 31% and 19% of contract revenue in 1994 and 1993, respectively. Cost of goods sold for the SB Products was $26.5 million, $28.8 million and $11.7 million in 1994, 1993 and 1992, respectively. The decline from 1993 to 1994 was principally the result of lower unit sales. Gross margins improved from 34% in 1993 to 38% in 1994 due to a sales mix shift towards higher margin products and a price increase imposed in early 1994. The increase in cost of goods sold from 1992 to 1993 was the result of twelve months of 1993 sales versus four months of post-merger sales in 1992. Research and development expenses were $34.5 million in 1994 compared to $39.5 million and $29.9 million in 1993 and 1992, respectively. The 1994 decrease from 1993 reflects the late 1993 staffing reduction associated with the elimination of certain projects as a result of the strategic refocusing of the Company and the 1994 consolidation of Baltimore, Maryland research and development operations with those in Mountain View, California. The 1993 increase over 1992 is due to the inclusion of a greater share of the cost of Nova operations from the date of the merger and expanded product development activities for the Company's lead products. Marketing, general and administrative expenses were $15.7 million in 1994 compared to $18.2 million and $12.2 million in 1993 and 1992, respectively. Although higher sales and marketing spending occurred in 1994 to support the increased sales activities, the increase was more than offset in 1994 by expense reductions in general and administrative areas associated with the strategic refocusing and the consolidation of research and development operations. The cost increase from 1992 to 1993 reflects twelve months of costs for the Nova administrative and marketing operations in 1993 versus four months in 1992. 19 The profit distribution to third parties of $5.2 million in 1994 and $4.3 million in 1993 represents SB's share of the net profits from sales of the SB Products. The 1994 increase over 1993 is due to higher gross margins and a lower allocation of sales and marketing expenses for SB Product sales. The increase in profit distribution to third parties from $1.5 million in 1992 to $4.3 million in 1993 was due to 1993's twelve months of SB Product sales versus only four months in 1992. In September 1994, the Company recorded a charge of $3.5 million associated with the closure of its research and development facility in Baltimore, Maryland and the transfer of certain research and development operations to Mountain View, California. The consolidation was undertaken to eliminate redundancies, reduce future expenses and increase productivity by concentrating research and development activities in one location. As a result of the consolidation, forty-one positions were eliminated in 1994 and ten additional positions are expected to be eliminated in the first quarter of 1995. Twelve employees were relocated to Mountain View, California. The Company's Commercial Operations staff, which was formerly located at the site being closed, moved to a smaller office space in Baltimore in the first quarter of 1995. Other income decreased to $4.0 million in 1994 from $6.3 million in 1993 and $7.3 million in 1992. The decrease year to year resulted primarily from lower income generated by the Company's investment portfolio. The 1994 decrease from 1993 was also due to lower rental income from sublease tenants and higher royalty expense associated with the increased contract revenue. In June 1994, the Company's subsidiary, Guilford Pharmaceuticals Inc., ("Guilford") completed an initial public stock offering which reduced the Company's ownership in Guilford from 62% to 29%. Upon the reduction in ownership percentage, the Company began using the equity method of accounting for its investment in Guilford. Prior to the date of the public stock offering, the financial results of Guilford were consolidated with those of the Company. The minority interest of $0.6 million and $0.4 million in 1994 and 1993, respectively, reflects the minority shareholders portion of Guilford losses when the Company was fully consolidating Guilford operations. The equity in net loss of affiliates of $0.9 million in 1994 represents the Company's share of the losses of Guilford. Recognition of these losses reduced the Company's investment in Guilford to zero by December 31, 1994. The equity loss of $0.6 million in 1992 represents the Company's share of the losses of NTLP from the merger date. The Company's investment in NTLP was reduced to zero by year-end 1992. 20 OUTLOOK The Company expects to continue to incur losses for several more years. The ability of the Company to achieve profitability depends principally upon the success of: (i) product development efforts and the timing and scope of regulatory approvals, particularly with respect to the Company's lead products, AURICULIN[REGISTERED TRADEMARK] anaritide and NATRECOR[REGISTERED TRADEMARK] BNP; (ii) the Company's strategy of generating operating profits from marketing and selling the SB Products, HALDOL[REGISTERED TRADEMARK] Decanoate and additional third-party products, which it is actively seeking to acquire; and (iii) the development of new third-party funding sources and other revenues to support continuing research and development programs. Profitability will also be affected by the Company's ability to undertake complex manufacturing processes in a cost-effective manner. In early 1995, the Company completed patient enrollment in its Phase III clinical study of AURICULIN for the treatment of acute renal (kidney) failure. Upon completion of the statistical analysis of the study, the Company, along with its partner, Genentech, will determine the next appropriate steps based on results of the study. If the Company and Genentech determine that the results of the Phase III study provide sufficiently compelling evidence of AURICULIN's safety and efficacy, the Company will proceed as rapidly as possible to prepare and submit a New Drug Application to the Food and Drug Administration. If the Company determines that a confirmatory study or studies are required, the Company plans to initiate the additional study(s) as soon as is practical. It is also possible that the results of the study will not warrant any further development of AURICULIN. Hence, the outcome of the trial, and resulting steps taken by the Company, will have a significant effect on the Company's future profitability. Further development of the Company's products will require substantial additional investment to cover, among other things, the costs of clinical trials, the securing of commercial scale manufacturing capability and the marketing and sales expenses associated with product introductions. While market introduction of new products will require considerable expenditures by the Company, revenues generated from such products, assuming they are successfully developed, may not be realized for several years. In the case of AURICULIN, the Company alone is responsible for continued development costs, but marketing and related costs will be shared by Genentech in the United States and Canada. Genentech will also share in any marketing profits from AURICULIN sales in the United States and Canada. 21 Sales of the SB Products are likely to decrease during the next few years because of increased competition from generic products. The Company hopes to more than offset any such decrease with revenues from its co-promotion of HALDOL[REGISTERED TRADEMARK] Decanoate and the promotion of any additional third-party products. There can be no assurance that such additional products will be available on terms favorable to the Company or at all. A portion of the Company's revenues will continue to be derived from collaborative research agreements. Future collaborative funding will depend, in part, upon priorities set by the sponsors in relation to the sponsor's other product opportunities and its assessment of the continued benefit of sponsoring a particular program at the Company. Other licenses, as well as agreements to manufacture and supply bulk materials, are also subject to termination by the licensee or contract sponsor under certain circumstances. For the reasons stated above, the operating results of the Company are expected to fluctuate from period to period. Inflation is not expected to have a significant effect upon the business of the Company. In addition, because the Company participates in a highly dynamic industry, the Company's common stock price is subject to significant volatility as a result of developments in the biopharmaceutical industry. PRO FORMA OPERATING RESULTS Operating results of the Company reflect the effects of the merger of Scios and Nova from the merger date, September 3, 1992. The following pro forma financial information for 1992 assumes that the merger of Scios and Nova had occurred on the first day of 1992 adjusted to exclude certain non-recurring merger-related expenses. On a pro forma basis, total revenues for 1992 would have been approximately $56.2 million with SB Product sales of $43.7 million and contract revenues of $12.5 million. Gross margins from product sales, as a percentage of such sales, would have been 32% in 1992. Pro forma research and development expenses would have been $46.8 million and marketing, general and administration expenses $16.6 million in 1992. Pro forma total costs and expenses for 1992, including cost of goods sold and profit distribution to third parties would have been $97 million with other income of $8.5 million. 22 LIQUIDITY AND CAPITAL RESOURCES Combined cash, cash equivalents and securities (both current and non-current) totaled $104.4 million at December 31, 1994, a decrease of $3.8 million from December 31, 1993. The decrease is mainly attributable to the $19.7 million used to fund operations and $3.2 million of spending on property, plant and equipment partially offset by proceeds from the sale of preferred stock to Genentech ($20 million). Working capital decreased from $96.3 million at December 31, 1993 to $38.9 million at December 31, 1994. The decrease resulted principally from a decrease in current available-for-sale securities and a corresponding increase in non-current available-for-sale securities. To date, the Company's operations and capital requirements have been financed primarily from the proceeds of public and private sales of common stock, research and development partnerships, collaborative agreements with pharmaceutical firms, product sales and investment income. The tax effect of the Company's net operating losses and tax credit carryforwards will provide an additional source of liquidity only to the extent that profitable operations are achieved prior to the expiration of carryforward periods. The utilization of losses generated through the date of the merger will be subject to annual limitations. OUTLOOK The Company's cash, cash equivalents and marketable securities of approximately $104.4 million at December 31, 1994, together with revenues from product sales, collaborative agreements and interest income, will be used to fund new and continuing research and development programs, expanded clinical trials for its products under development and other general purposes. The Company believes its cash resources will be sufficient to meet its capital requirements for at least the next two years. Over the long term, the Company will need to arrange additional financing for the future operation of its business, including the commercialization of its products currently under development, and will consider collaborative arrangements and additional public or private financings, including additional equity financings. There can be no assurances that such additional funding can be obtained on reasonable terms. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements and Financial Statement Schedules appearing on page F-1 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 23 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT IDENTIFICATION OF DIRECTORS. The information required by Item 10 of Form 10-K with respect to identification of directors is incorporated by reference to the information contained in the section captioned "Election of Directors" of the Company's definitive Proxy Statement for the 1995 Annual Meeting of Stockholders. IDENTIFICATION OF EXECUTIVE OFFICERS. See pages 15 and 16 of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in the sections captioned "Executive Compensation" and "Stock Option Grants and Exercises" of the Company's definitive Proxy Statement for the 1995 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 of Form 10-K is incorporated by reference to the information contained in the section captioned "Security Ownership of Management and Principal Stockholders" of the Company's definitive Proxy Statement for the 1995 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 of Form 10-K is incorporated by reference to the information contained in the section captioned "Certain Relationships and Transactions" of the Company's definitive Proxy Statement for the 1995 Annual Meeting of the Stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS. See Index to Financial Statements and Financial Statement Schedules at page F-1 of this Form 10-K. (2) FINANCIAL STATEMENT SCHEDULES. See Index to Financial Statements and Financial Statement Schedules at page F-1 of this Form 10-K. (3) EXHIBITS. See Exhibit Index at page 25 of this Form 10-K. (b) REPORTS ON FORM 8-K. There were no reports on Form 8-K filed in the last quarter of 1994. 24 EXHIBIT INDEX Exhibit Number Page ------ ---- 3.1 Certificate of Incorporation . . . . . . . . . . . . . . . . . . . 3.2 Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J 10.1 Biotechnology Research Partners, Ltd. Agreement of Limited Partnership dated October 29, 1982; Development Contract, Technology License Agreement and Joint Venture Agreement between Biotechnology Research Partners, Ltd. and the Registrant dated December 29, 1982; Promissory Note dated December 29, 1982; and Memorandum of Understanding between Battery Park Credit Company and Biotechnology Research Partners, Ltd. dated December 28, 1982 . . . . . . . . . . . . . A 10.2 1983 Incentive Stock Option Plan, as amended, and form of Stock Option Agreement, Promissory Note and Pledge Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . E 10.3 Common Stock Purchase Agreement dated April 15, 1985 between the Registrant and American Home Products Corporation. . . . . . B 10.4 Agreement of Purchase and Sale (Real Estate) and Joint Escrow Instructions by and between Charleston Properties and Bio-Shore Holdings, Ltd. dated December 30, 1986 . . . . . . . . . . . . . C 10.5 1986 Supplemental Stock Option Plan, as amended, and form of Stock Option Agreement, Promissory Note and Pledge Agreement . . E 10.6 Rights Exercise Agreement between the Registrant and American Home Products Corporation dated February 28, 1986 and Letter of March 26 and May 16, 1986 . . . . . . . . . . . . . . . . . . B 10.7 Subscription and Shareholders Agreement between the Registrant and Swedish Genetic Investments AB dated October 2, 1987 . . . . D 10.8 Employment Letter dated November 11, 1987 and Promissory Notes dated January 4, 1988, between the Registrant and Richard L. Casey . . . . . . . . . . . . . . . . . . . . . . . . D 10.9 Rights Agreement dated as of June 18, 1990 between the Registrant and The First National Bank of Boston . . . . . . . . F 10.10 Agreements and Plan of Reorganization dated November 26, 1991 between the Registrant and each of Jeffrey S. Flier, Ronald C. Kahn, Bruce M. Spiegelman and Joel F. Habener. . . . . . . . . . H 10.11 1992 Equity Incentive Plan . . . . . . . . . . . . . . . . . . . H 10.12 Agreement and Plan of Reorganization by and among the Registrant, Nova Pharmaceutical Corporation and DD Acquisition Subsidiary, Inc. dated as of May 12, 1992, as amended, July 17, 1992 . . . . J 10.12 Form of Technology Transfer Agreement between Nova Technology Limited Partnership, Nova and Nova Technology Corporation. . . . I 25 Page ---- 10.14 Form of Manufacturing and Marketing Agreement between Nova Technology Limited Partnership and Nova. . . . . . . . . . . . . I 10.15 Amended and Restated Agreement of Limited Partnership of Nova Technology Limited Partnership . . . . . . . . . . . . . . . . . I 10.16 Form of Research Agreement between Nova Technology Limited Partnership and Nova . . . . . . . . . . . . . . . . . . . . . . I 10.17 Form of Guaranty given by Nova to Nova Technology Limited Partnership and its limited partners . . . . . . . . . . . . . . I 10.18 Form of Purchase Option Agreement between each of the limited partners of Nova Technology Limited Partnership and Nova . . . . I 10.19 Nonemployee Director Stock Option Plan . . . . . . . . . . . . . G 10.20 Warrant Agreement dated December 1, 1987 between the Registrant and IBJ Schroder Bank & Trust Company. . . . . . . . . . . . . . K 10.21 Consulting Agreement dated August 1, 1993 between the Registrant and Solomon H. Snyder, MD. . . . . . . . . . . . . . . . . . . . Q 10.22 Consulting Agreement dated September 3, 1992 between the Registrant and Hans Mueller. . . . . . . . . . . . . . . . . . . R 10.23 Lease dated September 30, 1985, as amended, between McCormick Properties, Inc. and the Registrant. . . . . . . . . . . . . . . O 10.24 Agreement dated March 21, 1986 between Celanese and Nova, including option agreement and other exhibits thereto. . . . . . L 10.25 Purchase Option Agreements dated December 1, 1987 and December 30, 1987 between Nova and the limited partners of Nova Technology Limited Partnership. . . . . . . . . . . . . . . . . . . . . . . K 10.26 Warrant Agreement dated December 1, 1987 between Nova and Dean Witter Reynolds Inc. . . . . . . . . . . . . . . . . . . . . . . K 10.27 Purchase Agreement dated as of July 29, 1988 between Nova and SKB Properties, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . M 10.28 Stock Purchase Warrant dated July 29, 1988 to purchase Common Stock of the Registrant. . . . . . . . . . . . . . . . . . . . . M 10.29 CNS Psychiatric Products Agreement dated June 30, 1990 between SmithKline Beecham Corporation and Nova. . . . . . . . . . . . . N 10.30 Master Security Agreement, Promissory Note and Negative Covenant Agreement, each dated April 28, 1993, between the Registrant and General Electric Capital Corporation . . . . . . . . . . . . . . P 10.31 Master Lease Agreement dated July 16, 1993 between the Registrant and General Electric Capital Corporation . . . . . . . . . . . . P 26 10.32 Collaboration Agreement dated December 30, 1994 between the Registrant and Genentech, Inc. . . . . . . . . . . . . . . . . . . 10.33 Preferred Stock Purchase Agreement dated December 30, 1994 between the Registrant and Genentech, Inc. . . . . . . . . . . . . . . . . 10.34 Note Agreement dated December 30, 1994 between the Registrant and Genentech, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . 11.1 Computation of Loss per Share. . . . . . . . . . . . . . . . . . . 22.1 Subsidiaries of Registrant . . . . . . . . . . . . . . . . . . . . 24.1 Consent of Coopers & Lybrand . . . . . . . . . . . . . . . . . . . 25.1 Powers of Attorney. Reference is made to page 29. -------------------- A Filed as an exhibit to Form S-1 Registration Statement (File No. 2-86086), as amended, and incorporated herein by reference. B Filed as an exhibit to Form S-1 Registration Statement (File No. 33-3186), as amended, and incorporated herein by reference. C Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1986 and incorporated herein by reference. D Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1987 and incorporated herein by reference. E Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1988 and incorporated herein by reference. F Filed as an exhibit to Form 8-K filed on June 19, 1990 and Form 8-A Registration Statement filed on June 20, 1990 and incorporated herein by reference. G Filed as an exhibit to Form S-8 Registration Statement (File No. 33-39878) filed on April 8, 1991 and incorporated herein by reference. H Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1991 and incorporated herein by reference. I Filed as an exhibit to Form S-1 Registration Statement (File No. 33-14937) filed on behalf of Nova Technology Limited Partnership and incorporated herein by reference. J Filed as an exhibit to Form S-4 Registration Statement (File No. 33-49846) filed on July 22, 1992 and incorporated herein by reference. K Filed as an exhibit to Form S-3 Registration Statement of Nova (File No. 33-14938) and incorporated herein by reference. L Filed as an exhibit to Nova's Annual Report on Form 10-K for fiscal year 1985 and incorporated herein by reference. M Filed as an exhibit to Nova's Report on Form 8-K dated July 29, 1988 and incorporated herein by reference. N Filed as an exhibit to Nova's Annual Report on Form 10-K for fiscal year 1990 and incorporated herein by reference. O Filed as an exhibit to Nova's Annual Report on Form 10-K for fiscal year 1986 and incorporated herein by reference. 27 P Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference. Q Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 and incorporated herein by reference. R Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1992 and incorporated herein by reference. 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SCIOS NOVA INC. Date: March 24, 1995 By /s/ Richard L. Casey ------------------------------------ Richard L. Casey Chairman of the Board, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard L. Casey his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that the said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Richard L. Casey Chairman of the Board, President and March 24, 1995 --------------------- Richard L. Casey Chief Executive Officer (Principal Executive Officer) /s/ W. Virginia Walker Vice President of Finance and March 24, 1995 --------------------- W. Virginia Walker Administration and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Myron Du Bain Director March 24, 1995 --------------------- Myron Du Bain /s/ Steven D. Goldby Director March 24, 1995 --------------------- Steven D. Goldby /s/ William F. Miller Director March 24, 1995 --------------------- William F. Miller /s/ Donald E. O'Neill Director March 24, 1995 --------------------- Donald E. O'Neill /s/ Robert W. Schrier Director March 24, 1995 --------------------- Robert W. Schrier /s/ Solomon H. Snyder Director March 24, 1995 --------------------- Solomon H. Snyder /s/ Eugene L. Step Director March 24, 1995 --------------------- Eugene L. Step 29 FINANCIAL STATEMENTS AND SCHEDULES Page ---- Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . F-2 Consolidated Balance Sheets at December 31, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Operations for the years ended December 31, 1994, 1993 and 1992. . . . . . . . . . . . . . . . . . . . . . F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992. . . . . . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . F-6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . F-7 Financial Statement Schedules (Omitted because they are not required, are not applicable, or the information is included in the consolidated financial statements or notes thereto.) F-1 REPORT OF INDEPENDENT ACCOUNTANTS -------------------------------------------------------------------------------- To the Board of Directors and Stockholders of Scios Nova Inc.: We have audited the accompanying consolidated balance sheets of Scios Nova Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Scios Nova Inc. and subsidiaries as of December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. ---------------------------- Coopers & Lybrand L.L.P. San Jose, California February 1, 1995 F-2 CONSOLIDATED BALANCE SHEETS --------------------------------------------------------------------------------
DECEMBER 31, 1994 1993 -------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash and cash equivalents $ 29,674 $ 13,587 Available-for-sale securities 22,441 90,312 Accounts receivable 3,529 2,614 Other receivables 70 1,681 Prepaid expenses 1,147 1,200 -------------------------------------------------------------------------------- Total current assets 56,861 109,394 Available-for-sale securities, non-current 52,324 4,372 Property and equipment, net 35,118 36,879 Other assets 1,793 633 -------------------------------------------------------------------------------- Total Assets $ 146,096 $ 151,278 -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,301 $ 2,168 Other accrued liabilities 11,557 9,637 Deferred contract revenue 2,444 617 Current portion of long-term debt 617 638 -------------------------------------------------------------------------------- Total current liabilities 17,919 13,060 Minority interests -- 596 Long-term debt 1,739 2,323 Commitments (Notes 9 and 10) Stockholders' equity: Preferred stock; $.001 par value; 20,000,000 shares authorized; 21,053 issued and outstanding -- -- Common stock; $.001 par value; 150,000,000 shares authorized; issued and outstanding: 35,283,200 and 35,109,937, respectively 35 35 Additional paid-in capital 391,745 370,468 Notes receivable (27) (159) Unrealized losses on securities (2,309) -- Accumulated deficit (263,006) (235,045) -------------------------------------------------------------------------------- Total stockholders' equity 126,438 135,299 -------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 146,096 151,278 --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-3 CONSOLIDATED STATEMENTS OF OPERATIONS --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1994 1993 1992 -------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT SHARE DATA) Revenues: Product sales $ 42,792 $ 43,585 $ 17,344 Co-promotion commissions 3,770 500 -- Research & development contracts 7,105 3,483 7,741 -------------------------------------------------------------------------------- 53,667 47,568 25,085 -------------------------------------------------------------------------------- Costs and expenses: Cost of goods sold 26,541 28,782 11,713 Research and development 34,491 39,490 29,945 Marketing, general and administration 15,681 18,190 12,191 Profit distribution to third parties 5,173 4,343 1,495 Restructuring charges 3,500 -- -- Write-off of purchased technology -- -- 108,444 -------------------------------------------------------------------------------- 85,386 90,805 163,788 -------------------------------------------------------------------------------- Loss from operations (31,719) (43,237) (138,703) Other income: Investment income 4,386 6,592 6,846 Other income (expense), net (341) (294) 492 -------------------------------------------------------------------------------- 4,045 6,298 7,338 Equity in net loss of affiliates (883) (15) (581) Minority interests 596 375 -- -------------------------------------------------------------------------------- Net loss $(27,961) $(36,579) $(131,946) -------------------------------------------------------------------------------- Net loss per common share $ (0.79) $ (1.05) $ (5.76) -------------------------------------------------------------------------------- Weighted average number of common shares outstanding 35,219,442 34,768,195 22,915,336 --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-4 CONSOLIDATED STATEMENTS OF CASH FLOWS --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1994 1993 1992 -------------------------------------------------------------------------------- (IN THOUSANDS) Cash flows from operating activities: Net Loss $ (27,961) $ (36,579) $(131,946) Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 4,693 4,588 3,440 Write-off of purchased technology -- -- 108,444 Other 1,898 1,219 1,301 Change in assets and liabilities, net of Nova acquisition: Accounts receivable (915) 2,211 (2,226) Accounts payable 1,133 321 (2,577) Other accrued liabilities 2,498 (513) (1,236) Other (997) 149 1,552 -------------------------------------------------------------------------------- Net cash used by operating activities (19,651) (28,604) (23,248) -------------------------------------------------------------------------------- Cash flows from investing activities: Payments for property and equipment, net (3,179) (2,269) (4,773) Acquisition of Nova Pharmaceutical Corporation and Nova Technology Limited Partnership, net of cash received -- -- (3,435) Sales of marketable securities 454,147 266,226 95,798 Purchases of marketable securities (435,036) (229,325) (90,056) -------------------------------------------------------------------------------- Net cash provided (used) by investment activities 15,932 34,632 (2,466) Cash flows from financing activities: Proceeds from issuance of preferred stock 20,000 -- -- Proceeds from exercise of common stock warrants -- -- 7,950 Issuance of common stock and collection of notes receivable from stockholders, net 411 2,032 785 Issuance of common stock for technology acquisition -- -- 712 Issuance of long-term debt -- 2,801 -- Payments of long-term debt (605) (349) (10,483) -------------------------------------------------------------------------------- Net cash provided (used) by financing activities 19,806 4,484 (1,036) ------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 16,087 10,512 (26,750) Cash and cash equivalents at beginning of period 13,587 3,075 29,825 -------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 29,674 $ 13,587 $ 3,075 -------------------------------------------------------------------------------- Supplemental cash flow data: Net unrealized securities losses $ (2,309) -- --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-5 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY --------------------------------------------------------------------------------
Notes Common Stock Additional Preferred Receivable Unrealized ----------------------- Paid-In Stock from Losses on Accumulated Shares Par Value Capital Par Value Stockholders Securities Deficit Total ------------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS, EXCEPT SHARE DATA) Balances at December 31, 1991 18,322,847 $183 $222,429 $-- $ -- $ -- $ (66,520) $ 156,092 Issued in acquisitions 14,863,238 149 135,380 135,529 Warrants exercised 1,232,188 12 7,939 7,951 Options exercised 125,158 1 869 (85) 785 Other 74,681 1 732 733 Change in par value (311) 311 -- Net loss (131,946) (131,946) ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 1992 34,618,112 $ 35 $367,660 $-- $ (85) $ -- $(198,466) $(169,144) Options exercised 409,255 2,106 (74) 2,032 Incentive plan awards 61,357 449 449 Other 21,213 253 253 Net loss (36,579) (36,579) ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 1993 35,109,937 $ 35 $370,468 $-- $(159) $ -- $(235,045) $ 135,299 Issued to Genentech, Inc. 20,000 20,000 Options exercised 71,702 375 132 507 Incentive plan awards 65,349 578 578 Other 36,212 324 324 Unrealized losses on available-for-sale securities (2,309) (2,309) Net loss (27,961) (27,961) ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 1994 35,283,200 $ 35 $391,745 $-- $ (27) $(2,309) $(263,006) $ 126,438 ------------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Scios Nova Inc. ("the Company") and its wholly-owned and majority-owned subsidiaries. Other affiliates, more than 20% but less than 50% owned, are accounted for on the equity basis. Intercompany transactions and balances are eliminated on consolidation. CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of less than ninety days to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. AVAILABLE-FOR-SALE SECURITIES Beginning January 1, 1994, the Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." All marketable securities at December 31, 1994 were deemed by management to be available for sale and are stated at fair value with net unrealized gains or losses reported in stockholders' equity. Adoption of Statement No. 115 did not have a material effect on the Company's Consolidated Financial Statements. Available-for-sale securities consist of short- and medium-term interest-bearing corporate securities and U.S. Treasury Notes. At December 31, 1993, the Company followed Financial Accounting Standards No. 12, "Accounting for Certain Marketable Securities." At December 31, 1993, all marketable securities were stated at cost, which approximated market value. Premiums and discounts were amortized over the period from acquisition to maturity. CONCENTRATION OF CREDIT RISK The Company's excess cash is invested in a diversified portfolio of securities consisting of U.S. Treasury Notes, deposits with major banks and financial institutions, and in investment-grade interest-bearing corporate securities issued by companies in a variety of industries. DEPRECIATION AND AMORTIZATION Buildings and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets (3 to 7 years for equipment and 5 to 40 years for buildings). Leasehold improvements are amortized on a straight-line basis over the shorter of the asset life or fixed lease term. PRODUCT SALES Revenue from sales of certain psychiatric products (the "SB Products") under license from SmithKline Beecham Corporation (see Note 3) is recognized in the period in which the products are shipped. Provision is made for estimated returns and allowances, cash discounts and rebates attributable to Medicaid programs. F-7 CO-PROMOTION COMMISSIONS Revenue from co-promotion commissions (see Note 3) is recognized based on estimated sales levels of McNeil Pharmaceutical's psychiatric product HALDOL [REGISTERED TRADEMARK] Decanoate for the contract year. CONTRACT REVENUES Research and development contract revenues from cost-reimbursement agreements are recorded as the related expenses are incurred, up to contractual limits. Payments received which are related to future performance are deferred and recorded as revenues as they are earned over specified future performance periods. Research and development payments for which no services are required to be performed in the future and license payments irrevocably received are recognized as revenues upon receipt. Research and development expenses in 1994, 1993 and 1992 include approximately $2.9 million, $3.1 million and $5.5 million, respectively, incurred in connection with programs subject to cost reimbursement, collaborative or other performance agreements. PER SHARE DATA Loss per share is based on the weighted average number of common shares outstanding for all periods. Stock options, warrants and preferred stock are antidilutive and therefore excluded from the calculation. 2. Merger with Nova Group A. NOVA PHARMACEUTICAL CORPORATION On September 3, 1992 ("date of merger"), Nova Pharmaceutical Corporation ("Nova") was merged into Scios Inc. ("Scios") and the combined company was renamed Scios Nova Inc. The acquisition was accounted for under the purchase method of accounting. The results of operations of Nova are included with the Company's results of operations with effect from the date of merger. The Company issued common stock and stock options valued at $114.5 million, assumed liabilities of $22.9 million and incurred $3.6 million in additional costs related to the merger. Total consideration as allocated to the assets acquired was as follows:
(IN THOUSANDS) Current assets $ 3,995 Marketable securities 40,472 Property and equipment 8,026 Other assets 1,022 In-process technology 87,465 -------------------------------------------------------------------------------- $140,980 --------------------------------------------------------------------------------
F-8 The portion of the purchase price allocated to in-process technology was charged as an operating expense in 1992. B. NOVA TECHNOLOGY LIMITED PARTNERSHIP In December 1992, the Company exercised its option to acquire all limited partner interests in Nova Technology Limited Partnership ("NTLP") for $20.4 million and transaction costs of approximately $0.1 million. The Company also issued contingent payment rights to all limited partners of the partnership, pursuant to which the Company is obligated until January 15, 2008 to pay royalties on the sale or license of certain products that were under development by the partnership. The total expense of $20.5 million was allocated entirely to in-process technologies and charged as an operating expense in 1992. C. CASH FLOWS The merger of Scios and Nova and the acquisition of NTLP included certain non-cash investing and financing activities as follows (in thousands of dollars): Common stock and stock options issued $ 134,817 Liabilities assumed 22,902 Assets acquired (53,192) In-process technology (107,962) Cash paid 3,435
D. UNAUDITED PRO FORMA INFORMATION The following unaudited pro forma condensed statement of operations information has been prepared to give effect to the merger as if such transaction had occurred at the beginning of the period presented. The historical results of operations have been adjusted to reflect the elimination of nonrecurring and merger-related expenses. The information presented is not necessarily indicative of the results of future operations of the merged companies.
YEAR ENDED DECEMBER 31, (UNAUDITED) 1992 -------------------------------------------------------------------------------- (IN MILLIONS, EXCEPT SHARE DATA) Revenues $ 56.1 Net loss $(33.9) Pro forma loss per share $(1.07)
F-9 3. Joint Business Arrangements A. AGREEMENT WITH SMITHKLINE BEECHAM Under the terms of an agreement with SmithKline Beecham Corporation ("SB"), the Company has the exclusive U.S. rights to market the SB Products. SB is fully responsible for ancillary matters relating to sales of the SB Products (including various administrative tasks), for the maintenance in good standing of all New Drug Applications with respect to the SB Products and for the maintenance of product liability insurance. The Company pays SB 40% of net profits, as defined in the agreement, from U.S. sales of the SB Products. B. AGREEMENT WITH MCNEIL PHARMACEUTICAL In July 1993, the Company entered into a five-year agreement with McNeil Pharmaceutical ("McNeil"), an affiliate of Johnson & Johnson, to jointly promote the injectable antipsychotic HALDOL [REGISTERED TRADEMARK] Decanoate. Under the agreement, the Company receives payments based on achieving specified levels of sales. McNeil manufactures and distributes the product. The agreement may be extended up to an additional three years upon the attainment of revenue goals. C. AGREEMENT WITH GENENTECH, INC. In December 1994, the Company entered into a collaboration agreement with Genentech, Inc. ("Genentech") for the development and commercialization of AURICULIN [REGISTERED TRADEMARK] anaritide for the treatment of acute renal failure. The two companies will co-promote AURICULIN for this indication in the United States and Canada, and share equally profits from its commercialization. Genentech received exclusive marketing rights to markets outside North America in return for a royalty on sales. Concurrent with the collaboration agreement, Genentech purchased $20 million of Scios Nova preferred stock, convertible into approximately 2.1 million shares of common stock and provided a $30 million loan to the Company in the form of a letter of credit (see Note 9). The loan can be drawn down through the year 2002. Genentech has also agreed to pay the Company up to $50 million in milestone payments upon the achievement of key development events and commercial targets. D. AGREEMENT WITH KAKEN PHARMACEUTICAL CO., LTD. In September 1994, the Company entered into a series of agreements with Kaken Pharmaceutical Co., Ltd. ("Kaken") to expand a previous agreement signed in 1988 for FIBLAST [REGISTERED] TRADEMARK] bFGF ("FIBLAST"). Under the new agreements, the Company will collaborate with Kaken to further develop the FIBLAST manufacturing process, supply F-10 FIBLAST product to Kaken and provide Kaken a license to the Company's FIBLAST manufacturing technology. In return, Kaken will make milestone payments to the Company which are contingent on Kaken's continuing development of the product. 4. Affiliates In June 1994, Guilford Pharmaceuticals Inc. ("Guilford"), a fully consolidated subsidiary of the Company, completed an initial public offering which resulted in the Company's ownership declining from 62% to 29%. As a result, the equity method of accounting was adopted by the Company. Prior to the date of the public offering, the financial results of Guilford were fully consolidated with those of the Company. 5. Available-For-Sale Securities Unrealized gains and losses on available-for-sale securities at December 31, 1994 by classification were as follows:
Unrealized Unrealized Fair Value Cost Basis Gains Losses Net -------------------------------------------------------------------------------- (IN THOUSANDS) Debt securities: U.S. Government & Government Agency Securities $37,872 $39,732 $-- $(1,860) $(1,860) Corporate Bonds 36,893 37,342 7 (456) (449) -------------------------------------------------------------------------------- Total $74,765 $77,074 $ 7 $(2,316) $(2,309) --------------------------------------------------------------------------------
At December 31, 1994, scheduled maturities for available-for-sale securities were less than one year for $22,441,000 and between one and five years for $52,324,000. The Company realized gains of $43,879 and losses of $225,717 on the disposal of available-for-sale securities during 1994. F-11 6. Property and Equipment
DECEMBER 31, 1994 1993 -------------------------------------------------------------------------------- (IN THOUSANDS) Laboratory equipment $ 12,012 $ 12,409 Computer and related equipment 4,138 4,170 Furniture and other 2,782 2,811 Buildings and building improvements 41,371 39,401 -------------------------------------------------------------------------------- 60,303 58,791 Accumulated depreciation and amortization (26,532) (23,007) 33,771 35,784 Construction in progress 1,347 1,095 -------------------------------------------------------------------------------- $ 35,118 $ 36,879 --------------------------------------------------------------------------------
7. Other Assets
DECEMBER 31, 1994 1993 -------------------------------------------------------------------------------- (IN THOUSANDS) Deposits $ 127 $ 23 Other assets 268 9 Employee notes receivable 1,360 563 Acquired technology 38 38 -------------------------------------------------------------------------------- $1,793 $633 --------------------------------------------------------------------------------
8. Other Accrued Liabilities Other accrued liabilities at December 31, 1994 and 1993 comprised the following:
1994 1993 -------------------------------------------------------------------------------- (IN THOUSANDS) Accrued Medicaid rebates $ 2,387 $2,428 Accrued payroll 2,640 2,708 Profit distribution to third parties 1,645 1,361 Costs related to Nova acquisition 207 940 Restructure reserve 2,290 -- Other 2,388 2,200 -------------------------------------------------------------------------------- $11,557 $9,637 --------------------------------------------------------------------------------
F-12 In September 1994, the Company recorded a charge of $3.5 million associated with the closure of its research and development facility in Baltimore, Maryland and the transfer of certain research and development operations to the Company's Mountain View, California headquarters. Of the total restructuring charge, severance and related costs accounted for 34%, asset write-downs 49%, facility carrying costs 7% and chemical disposal and other expenses 10%. As of December 31, 1994, actual cash expenditures incurred as a result of the restructuring plan were approximately $1.2 million. The remaining $2.3 million provision consists of $0.5 million of additional cash expenses and $1.8 million of non-cash write-downs. It is anticipated that the remaining costs will be incurred by year-end 1995. In early 1995, the Company terminated its lease on the Baltimore research and development facility by exercising its option to purchase the building for approximately $3 million. The Company has recorded a charge of $1.25 million for the impairment of leasehold improvements in the Baltimore facility.
1994 1994 Provision Activity Balance -------------------------------------------------------------------------------- (IN THOUSANDS) Severance and relocation $1,178 $1,028 $ 150 Asset write-downs 1,701 (87) 1,788 Facility carrying costs 250 50 200 Chemical disposal and other 371 219 152 -------------------------------------------------------------------------------- $3,500 $1,210 $2,290 --------------------------------------------------------------------------------
9. Lease and Debt Commitments A. OPERATING LEASES The Company leases facilities under various operating leases in California and the land on which the Company's California facilities are located. The long-term ground lease expires in 2053. Beginning in July 2010, a portion of the annual ground rent is subject to renegotiation. Future minimum payments under these leases are as follows:
Operating Leases -------------------------------------------------------------------------------- (IN THOUSANDS) 1995 $171 1996 181 1997 181 1998 178 1999 186 -------------------------------------------------------------------------------- $897 --------------------------------------------------------------------------------
F-13 Rent expense for all operating leases was approximately $565,000, $601,000 and $565,000 in 1994, 1993 and 1992, respectively. B. CAPITAL LEASES and Long-term Debt At December 31, 1994, long-term debt and capital lease commitments were:
Capital Leases Debt -------------------------------------------------------------------------------- (IN THOUSANDS) 1995 $135 $ 680 1996 128 680 1997 9 778 1998 -- 375 1999 -- -- -------------------------------------------------------------------------------- 272 2,513 Less future interest (30) (399) -------------------------------------------------------------------------------- $242 $2,114 --------------------------------------------------------------------------------
Long-term debt consists of two five-year notes, secured by equipment, at interest rates of 9.5% and 9.8%. Under the terms of the notes, the Company is required to maintain a minimum cash and marketable securities balance of $35 million. C. GENENTECH LOAN COMMITMENT As part of the AURICULIN agreement with Genentech, Genentech has provided a $30 million loan to the Company in the form of a letter of credit. The loan can be drawn down through the year 2002, bearing interest at the prime rate. The loan is repayable in cash or Scios Nova common stock, at the prevailing market price, at the Company's option at any time through December 31, 2002. 10. Research Commitments The Company's commitments for research sponsorship payments to collaborators and institutions during 1995, 1996 and 1997 aggregate approximately $259,000. In 1988, the Company purchased the interests of Biotechnology Research Partners, a limited partnership ("BRP") in a joint venture and made a down payment of $575,000. The balance of the purchase price is to be paid in quarterly installments in accordance with the following formula: (i) until the minority partners have received payments of approximately $22.8 million, the Company will pay approximately 37% of the royalty income from third-party licenses and approximately 3.7% of the Company's gross sales of Partnership products; (ii) thereafter, until the minority F-14 partners have received aggregate payments of approximately $34.1 million, the Company will pay approximately 31% of the royalty income and approximately 3.1% of the Company's gross sales of Partnership products; and (iii) thereafter, until the earlier of 20 years from the date of exercise of the option or the time all patents relating to the Partnership's technology expire and all information relating to that technology becomes part of the public domain, the Company will pay to the minority partners approximately 20.5% of the royalty income and approximately 2% of the Company's gross sales of Partnership products. 11. Stockholders' Equity As part of the merger, the outstanding Nova warrants were converted into warrants to purchase approximately 4,645,000 shares of Scios Nova common stock. At December 31, 1994, warrants were outstanding to purchase approximately 2,662,000 shares at prices ranging from $8.84 to $55.13 per share and are generally exercisable through June 1998. The Company's preferred stock may be issued in series that have such rights as may be designated by the Board of Directors from time to time. There were 21,053 shares of Series A preferred stock issued and outstanding at December 31, 1994. These non-voting shares, which are convertible at the option of the holder into 2,105,300 shares of common stock, were issued to Genentech in connection with the AURICULIN collaboration agreement. They have rights to dividends if a dividend is paid on the common stock and preference upon a merger or liquidation of the Company equal to the $950.00 per share purchase price. There was no preferred stock issued and outstanding in the years ended 1993 and 1992. The Company has a Common Share Purchase Rights Plan under which stockholders have a right to purchase for each share held, one share of the Company's common stock at a 50% discount and, in certain circumstances, a share of common stock of an acquirer at a similar discount. The rights become exercisable, at $55.00 per right, in the event of an acquisition or tender offer which results in the acquisition of 20% or more of the Company's common stock. The rights may be redeemed, in certain circumstances, at $0.01 per right and expire on July 31, 2000. 12. Employee Benefits and Stock Option Plans The Company has a qualified profit sharing plan and trust under Internal Revenue Service Code sections 401(a) and 401(k). Employees are eligible to participate in the plan at the beginning of each calendar quarter during the year and can elect to contribute to the plan up to 15% of their F-15 salary subject to current statutory limits. In 1994, the Company matched employee contributions at a rate of 100% to a maximum of $3,000 per employee for the calendar year. The Company contribution vests over a three-year period. Company contributions to the plan totaled approximately $794,000 in 1994, $845,000 in 1993 and $234,000 in 1992. Under the Company's stock option plans, the following shares of common stock are authorized and available for grant as of December 31, 1994:
Shares Shares Options Available Plan Title Authorized Outstanding For Grant Option Price -------------------------------------------------------------------------------- 1983/86 2,200,000 1,275,689 41,912 Not less than 85% FMV 1989 170,000 43,000 0 Fair Market Value 1992 3,500,000 2,364,406 817,357 Not less than 85% FMV NQ 443,161 11,740 0 Not less than 85% FMV
Additional information with respect to the activity of outstanding options is summarized in the following table.
Number of Aggregate Common Stock Shares Option Price Price -------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT SHARE DATA) Balances at December 31, 1991 1,683,235 $5.00-$19.62 $ 16,896 Granted: In connection with Nova merger 639,824 $0.64-$20.54 3,304 Other 2,794,908 $2.56-$21.62 24,915 Exercised (125,158) $5.12-$14.00 (870) Canceled (816,665) $5.50-$21.62 (13,153) -------------------------------------------------------------------------------- Balances at December 31, 1992 4,176,144 $0.64-$21.13 31,092 Granted 317,269 $0.01-$ 6.88 2,035 Exercised (409,255) $0.01-$ 9.13 (2,106) Canceled (163,727) $5.63-$21.13 (1,301) -------------------------------------------------------------------------------- Balances at December 31, 1993 3,920,431 $0.16-$21.13 29,720 Granted 303,149 $6.63-$ 9.00 2,597 Exercised (71,702) $2.56-$ 9.13 (408) Canceled (457,043) $2.56-$18.46 (3,650) -------------------------------------------------------------------------------- Balances at December 31, 1994 3,694,835 $0.16-$21.13 $ 28,259 --------------------------------------------------------------------------------
At December 31, 1994, options to purchase 2,437,370 shares were fully vested. F-16 13. Significant Customers In 1994, 1993 and 1992, no customers contributed more than 10% of total revenues. In 1994, of the $3.5 million in accounts receivable, $1.5 million was a receivable from SB for prior period sales of the SB Products and $1.3 million was a receivable from McNeil based on realizing specific sales levels. 14. Income Taxes Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. As of January 1, 1993, no cumulative effect adjustment was required for the adoption of SFAS 109, as the resulting net deferred tax asset was fully reserved by a valuation allowance. The Company has federal and state income tax net operating loss ("NOL") carryforwards at December 31, 1994 for tax purposes available as follows: Federal $206,000,000 State 47,000,000 These federal and state carryforwards expire in the years 1997 through 2008, and 1997 through 1999, respectively. Due to a change in the ownership of the Company, as defined, approximately $120,000,000 of the federal NOL carryover is subject to an annual utilization limitation of $15,700,000, and approximately $22,700,000 of the state NOL carryover is subject to an annual utilization limitation of $9,300,000. Should another change in ownership occur, future utilization of the Company's NOL carryforwards may be subject to additional limitations. F-17 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are presented below:
YEAR ENDED DECEMBER 31, 1994 1993 -------------------------------------------------------------------------------- (IN THOUSANDS) Depreciable and amortizable assets, primarily technology $ 6,000 $ 5,900 Other accrued liabilities 3,100 2,500 State (net of federal benefit) 3,800 4,000 Net operating loss carryforward 70,000 57,800 Research credit 7,500 6,000 Valuation allowance (90,400) (76,200) -------------------------------------------------------------------------------- Net deferred tax asset $ -- $ -- --------------------------------------------------------------------------------
Due to the uncertainty surrounding the realization of the favorable tax attributes in future tax returns, the Company has placed a valuation allowance against its otherwise recognizable net deferred tax assets. F-18 EX-3.1 2 EXHIBIT 3.1 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF SCIOS INC. Scios Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware, does hereby certify as follows: FIRST: The name of the corporation is Scios Inc. SECOND: The corporation's original Certificate of Incorporation was filed with the Secretary of State on April 8, 1988. THIRD: The Restated Certificate of Incorporation of the corporation, in the form attached hereto as Exhibit A, has been duly adopted in accordance with the provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware by the Board of Directors and stockholders of the corporation. FOURTH: The Restated Certificate of Incorporation so adopted reads in full as set forth in Exhibit A attached hereto and is hereby incorporated by reference. FIFTH: The Restated Certificate of Incorporation in the form attached hereto shall be effective immediately upon the filing of the Agreement of Merger among Scios Inc., Nova Pharmaceutical Corporation and DD Acquisition Subsidiary, Inc. IN WITNESS WHEREOF, Scios Inc. has caused this Restated Certificate of Incorporation to be signed by its Chief Executive Officer and attested to by its Secretary this 3rd day of September, 1992. SCIOS INC. By /s/ Richard L. Casey ----------------------------------- Richard L. Casey, Chief Executive Officer ATTEST: /s/ John H. Newman ------------------------------------ John H. Newman, Secretary EXHIBIT A RESTATED CERTIFICATE OF INCORPORATION OF SCIOS NOVA INC. I. The name of the corporation is Scios Nova Inc. II. The address of the registered office of the corporation in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware 19801, and the name of the registered agent of the corporation in the State of Delaware at such address is The Corporation Trust Company. III. The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware. IV. A. The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under Delaware law. B. The corporation is authorized to provide indemnification of agents (as defined in Section 145 of the Delaware General Corporation Law) for breach of duty to the corporation and its stockholders through bylaw provisions, through agreements with the agents, and/or through stockholder resolutions, or otherwise, in excess of the indemnification otherwise permitted by Section 145 of the Delaware General Corporation Law, subject to the limitations on such excess indemnification set forth in Section 102 of the Delaware General Corporation Law. C. Any repeal or modification of this Article IV shall be prospective and shall not affect the rights under this Article IV in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. V. A. The corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is One Hundred Seventy Million (170,000,000) shares. One Hundred Fifty Million (150,000,000) shares shall be Common Stock, each having a par value of one-tenth of one cent ($.001). Twenty Million (20,000,000) shares shall be Preferred Stock, each having a par value of one-tenth of one cent ($.001). B. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, by filing a certificate pursuant to the Delaware General Corporation Law, to fix or alter from time to time the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof, including without limitation the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price or prices, and the liquidation preferences of any wholly unissued series of Preferred Stock, and to establish 1. from time to time the number of shares constituting any such series and the designation thereof, or any of them (a "Preferred Stock Designation"); and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then-outstanding. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. VI. For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: A. (i) The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed exclusively by one or more resolutions adopted from time to time by the Board of Directors. At each annual meeting of stockholders, directors shall be elected for a full term of one year. Notwithstanding any other provisions of this Certificate of Incorporation, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. (ii) The Board of Directors or any individual director may be removed from office at any time (A) with cause by the affirmative vote of the holders of a majority of the voting power of the then-outstanding shares of voting stock of the corporation entitled to vote generally in the election of directors (the "Voting Stock") voting together as a single class or (B) without cause by the holders of at least sixty-six and sixty-seven hundredths percent (66.67%) of the voting power of all of the then-outstanding Voting Stock voting together as a single class. (iii) Any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes shall be filled by either (i) the affirmative vote of the holders of a majority of the voting power of all of the then-outstanding shares of Voting Stock voting together as a single class; or (ii) by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such newly created directorship shall be filled by the stockholders, be filled only by the affirmative vote of the directors then in office, even though less than a quorum of the Board of Directors. B. (i) The Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and sixty-seven hundredths percent (66.67%) of the voting power of all of the then-outstanding shares of the Voting Stock. In furtherance and not in limitation of the power conferred by statute, the Board of Directors is expressly authorized to adopt, amend, supplement or repeal the Bylaws. The Board of Directors may from time to time make, amend, supplement or repeal the Bylaws; provided, however, that the stockholders may change or repeal any Bylaw adopted by the Board of Directors by the requisite affirmative vote of stockholders as set forth in the Bylaws; and, provided further, that no amendment or supplement to the Bylaws adopted by the Board of Directors shall vary or conflict with any amendment or supplement thus adopted by the stockholders. (ii) The directors of the corporation need not be elected by written ballot unless the Bylaws so provide. 2. (iii) No action shall be taken by the stockholders of the corporation except at an annual or special meeting of stockholders called in accordance with the Bylaws, and no action shall be taken by the stockholders by written consent. (iv) Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. VII. 1. The affirmative vote of the holders of not less than sixty-six and sixty-seven hundredths percent (66.67%) of the voting power of all of the then outstanding shares of Voting Stock shall be required for the approval or authorization of any "Business Combination" (as hereinafter defined) of this corporation or any subsidiary of this corporation with any "Related Person" (as hereinafter defined), notwithstanding the fact that no vote may be required or that a lesser percentage may be specified by law, in any agreement with any national securities exchange or otherwise; provided, however, that the sixty-six and sixty-seven hundredths percent (66.67%) voting requirement shall not be applicable and such Business Combination shall require only such affirmative vote as is required by law, any agreement with any national securities exchange or otherwise if: (a) The "Continuing Directors" (as hereinafter defined) of this corporation by at least a majority vote have expressly approved such Business Combination either in advance of or subsequent to such Related Person becoming a Related Person; or (b) All of the following conditions are met: (i) The cash or "Fair Market Value" (as hereinafter defined) as of the date of the consummation of the Business Combination (the "Combination Date") of the property, securities or other consideration to be received per share by holders of a particular class or series of capital stock, as the case may be, of this corporation in the Business Combination is not less than the highest of: (A) the highest per share price (including brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Related Person in acquiring beneficial ownership of any of its holdings of such class or series of capital stock of this corporation (i) within the two-year period immediately prior to the Combination Date or (ii) in the transaction or series of transactions in which the Related Person became a Related Person, whichever is higher, or (B) the Fair Market Value per share of the shares of capital stock being acquired in the Business Combination as of (i) the Combination Date or (ii) the date on which the Related Person became a Related Person, whichever is higher; or (C) in the case of Common Stock, the per share book value of the Common Stock as reported at the end of the fiscal quarter immediately prior to the Combination Date, and in the case of Preferred Stock, the highest preferential amount per share to which the holders of shares of any class or series of such Preferred Stock would be entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation, regardless of whether the Business Combination to be consummated constitutes such an event. The provision of this paragraph 1.(b)(i) shall be required to be met with respect to every class or series of outstanding capital stock, whether or not the Related Person has previously acquired any shares of a particular class or series of capital stock. In all of the above instances, appropriate adjustments shall be made for recapitalization and for stock dividends, stock splits and like distributions; and 3. (ii) The consideration to be received by holders of a particular class or series of capital stock shall be in cash or in the same form as previously has been paid by or on behalf of the Related Person in connection with its direct or indirect acquisition of beneficial ownership of shares of such class or series of capital stock. If the consideration so paid for any such shares varied as to form, the form of consideration for such shares shall be either cash or the form used to acquire beneficial ownership of the largest number of shares of such class or series of capital stock previously acquired by the Related Person; and (iii) After such Related Person has become a Related Person and prior to the consummation of such Business Combination: (A) except as approved by a majority of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on the outstanding Preferred Stock; (B) there shall have been (1) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Continuing Directors, and (2) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Continuing Directors; and (C) such Related Person shall have not become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Related Person becoming a Related Person; and (iv) After such Related Person has become a Related Person, such Related Person shall not have received the benefit, directly or indirectly (except as proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the corporation, whether in anticipation of or in connection with such Business Combination or otherwise; and (v) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to all stockholders of the corporation at least thirty (30) days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). 2. For purposes of this Article VII: (a) The term "Business Combination" shall mean any (i) merger or consolidation of this corporation or a Subsidiary (as hereinafter defined) of this corporation with a Related Person or any other corporation which is or after such merger or consolidation would be an "Affiliate" or "Associate" (as hereinafter defined) of a Related Person, (ii) sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) with any Related Person or any Affiliate or Associate of any Related Person, of all or any "Substantial Part" (as hereinafter defined) of the assets of this corporation or of a Subsidiary of this corporation to a Related Person or any Affiliate or Associate of any Related Person, (iii) adoption of any plan or proposal for the liquidation or dissolution of this corporation proposed by or on behalf of a Related Person or any Affiliate or Associate of any Related Person, (iv) sale, lease, exchange or other disposition, including without limitation a mortgage or other security device, of all or any Substantial Part of the assets of a Related Person or any Affiliate or Associate of any Related Person to this corporation or a Subsidiary of this corporation, (v) issuance or pledge of securities of this corporation or a Subsidiary of this corporation to or with a Related Person or any Affiliate or Associate of Related Person, (vi) reclassification of securities (including any reverse stock split) or recapitalization of this corporation or any other transaction that would have the effect, either directly or indirectly, of increasing the proportionate share of any class of equity or convertible securities of this corporation or any Subsidiary of this corporation which is directly or indirectly beneficially owned by any Related Person or any Affiliate or Associate of any Related Person, and (vii) agreement, contract or other arrangement providing for any of the transactions described in this definition of Business Combination. 4. (b) The term "person" shall mean any individual, firm, corporation or other entity and shall include any group comprised of any person and any other person with whom such person or any Affiliate or Associate of such person has any agreement, arrangement or understanding, directly or indirectly, for the purpose of acquiring, holding, voting or disposing of Voting Stock of this corporation. (c) The term "Related Person" shall mean any person (other than this corporation, or any Subsidiary and other than any profit-sharing, employee stock ownership or other employee benefit plan of this corporation or any Subsidiary or any trustee of or fiduciary with respect to any such plan when acting in such capacity) who or which: (i) is the beneficial owner (as hereinafter defined) of fifteen percent (15%) or more of the Voting Stock; (ii) is an Affiliate or Associate of this corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner of fifteen percent (15%) or more of the Voting Stock; or (iii) is an assignee of or has otherwise succeeded to the beneficial ownership of any shares of Voting Stock which were at any time within the two-year period immediately prior to such time beneficially owned by any Related Person, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. (d) A person shall be a "beneficial owner" of any Voting Stock: (i) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; (ii) which such person or any of its Affiliates or Associates has, directly or indirectly, (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (b) the right to vote pursuant to any agreement, arrangement or understanding; or (iii) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. (e) For the purposes of determining whether a person is a Related Person pursuant to subparagraph (c) of this paragraph 2, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of subparagraph (d) of this paragraph 2 but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. (f) The terms "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on July 27, 1992. (g) The term "Subsidiary" means any corporation of which a majority of any class of equity securities is owned, directly or indirectly, by this corporation; provided, however, that for the purposes of the definition of Related Person set forth in subparagraph (c) of this paragraph 2, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity securities is owned, directly or indirectly, by this corporation. 5. (h) The term "Continuing Director" means any member of the board of directors, while such person is a member of the board of directors, who is not an Affiliate, Associate or a representative of the Related Person involved in a proposed Business Combination and was a member of the board of directors prior to the time that the Related Person became a Related Person, and any successor of a Continuing Director, while such successor is a member of the board of directors, who is not an Affiliate, Associate or a representative of the Related Person and is appointed or elected to succeed a Continuing Director by a majority of Continuing Directors. Each initial director of this corporation elected by the incorporator of this corporation shall be a Continuing Director for purposes of this Article VII. (i) The term "Substantial Part" shall mean more than twenty percent (20%) of the Fair Market Value, as determined by a majority of the Continuing Directors, of the total consolidated assets of this corporation and its Subsidiaries taken as a whole as of the end of its most recent fiscal year ended prior to the time the determination is being made. (j) For the purposes of paragraph 1(b)(i) of this Article VII, the term "other consideration to be received" shall include, without limitation, capital stock retained by the stockholders. (k) The term "Fair Market Value" means (i) in the case of capital stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for the New York Stock Exchange Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such stock exchange, the highest closing sale price with respect to a share of such stock during the 30-day period preceding the date in question on the National Associate of Securities Dealers, Inc. Automated Quotation System or any successor system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined in good faith by a majority of the Continuing Directors; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined in good faith by a majority of the Continuing Directors. (l) A Related Person shall be deemed to have acquired a share of the Voting Stock of this corporation at the time when such Related Person became the beneficial owner thereof. If a majority of the Continuing Directors is not able to determine the price at which a Related Person has acquired a share of Voting Stock of this corporation, such price shall be deemed to be the Fair Market Value of the shares in question at the time when the Related Person became the beneficial owner thereof. With respect to shares owned by Affiliates, Associates or other persons whose ownership is attributed to a Related Person under the foregoing definition of Related Person, the price deemed to be paid therefor by such Related Person shall be the price paid upon the acquisition thereof by such Affiliate, Associate or other person, or, if such price is not determinable by a majority of the Continuing Directors, the Fair Market Value of the shares in question at the time when the Affiliate, Associate or other such person became the beneficial owner thereof. The fact that any Business Combination complies with the provisions of paragraph 1(b) of this Article VII shall not be construed to impose any fiduciary duty, obligation or responsibility on the board of directors, or any member thereof, to approve such Business Combination or recommend its adoption or approval to the stockholders of this corporation, nor shall such compliance limit, prohibit or otherwise restrict in any manner the board of directors, or any member thereof, with respect to evaluations of or actions and responses taken with respect to such Business Combination. A majority of the Continuing Directors of the corporation shall have the power and duty to determine for the purposes of this Article VII, on the basis of information known to them after reasonable inquiry, (a) whether a person is a Related Person, (b) the number of shares of Voting Stock beneficially owned by any person, and (c) whether a person is an Affiliate or Associate of another. A majority of the Continuing Directors of the corporation shall have the further power to interpret all of the terms and provisions of this Article VII. 6. VII. No holder of shares of stock of the corporation shall have any preemptive or other right, except as such rights are expressly provided by contract, to purchase or subscribe for or receive any shares of any class, or series thereof, of stock of the corporation, whether now or hereafter authorized, or any warrants, options, bonds, debentures or other securities convertible into, exchangeable for or carrying any right to purchase any share of any class, or series thereof, of stock; but such additional shares of stock and such warrants, options, bonds, debentures or other securities convertible into, exchangeable for or carrying any right to purchase any shares of any class, or series thereof, of stock may be issued or disposed of by the Board of Directors to such persons, and on such terms and for such lawful consideration, as in its discretion it shall deem advisable or as the corporation shall have by contract agreed. IX. The corporation is to have perpetual existence. X. (a) The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in paragraph (b) of this Article IX, and all rights conferred upon the stockholders herein are granted subject to this reservation. (b) Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least sixty-six and sixty-seven hundredths percent (66.67%) of the voting power of all of the then-outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal Article IV, Article VI, Article VII or Article X. 7. CERTIFICATE OF DESIGNATION OF SERIES A PREFERRED STOCK OF SCIOS NOVA INC. (Pursuant to Section 151 of the Delaware General Corporation Law) SCIOS NOVA INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), hereby certifies that the following resolution was adopted on December 21, 1994 at a duly held meeting of the Board of Directors of the Corporation as required by Section 151 of the General Corporation Law: RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of the Corporation in accordance with the provisions of its Certificate of Incorporation, the Board of Directors hereby creates a series of Preferred Stock, par value $.001 per share, of the Corporation and hereby states the designation and number of shares, and fixes the relative powers, preferences, rights, qualifications, limitations and restrictions thereof (in addition to the provisions set forth in the Certificate of Incorporation of the Corporation, which are applicable to the Preferred Stock of all classes and series), as follows: Series A Preferred Stock: SECTION 1. DESIGNATION AND AMOUNT. Twenty One Thousand Fifty- Three (21,053) shares of Preferred Stock, $.001 par value, are designated "Series A Preferred Stock" with the powers, preferences, rights, qualifications, limitations and restrictions specified herein (the "Series A Preferred Stock"). Such number of shares may be increased or decreased by resolution of the Board of Directors; PROVIDED, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. 1. SECTION 2. DIVIDENDS. No dividends (other than those payable solely in the Common Stock of the Corporation) shall be paid on any Common Stock of the Corporation unless a dividend is paid with respect to all outstanding shares of Series A Preferred Stock in an amount for each such share of Series A Preferred Stock equal to or greater than the aggregate amount of such dividends payable upon all shares of Common Stock into which such share of Series A Preferred Stock could then be converted. SECTION 3. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, before any payment shall be made to the holders of shares of the Common Stock of the Corporation, the holders of shares of Series A Preferred Stock shall be entitled to receive $950.00 per share of Series A Preferred Stock then held by such holders, plus an amount equal to declared and unpaid dividends and distributions thereon. After payment of the full liquidation preference of the Series A Preferred Stock set forth in the preceding sentence, the assets of the Corporation legally available for distribution, if any, shall be distributed ratably to the holders of the Common Stock. Any consolidation or merger of the Corporation with or into any other corporation or other entity or person, or any other corporate reorganization, in which the shareholders of the Corporation immediately prior to such consolidation, merger or reorganization, own less than 50% immediately after such consolidation, merger or reorganization, or any transaction or series of related transactions in which in excess of fifty percent (50%) of the Corporation's voting power is transferred, shall be considered a liquidation under this Section 3. SECTION 4. VOTING RIGHTS. The holders of shares of Series A Preferred Stock shall not have any voting rights, except as required under the General Corporation Law of Delaware. SECTION 5. CONVERSION. (A) RIGHT TO CONVERT. Each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, into that number of shares of the Common Stock of the Corporation as determined by dividing $950.00 by the Conversion Price, determined as provided below, in effect on the date the certificate for such share is surrendered for conversion. The Conversion Price for the Series A Preferred Stock shall initially be $9.50 per share. The number of shares of Common Stock into which a share of Series A Preferred Stock is convertible is hereinafter referred to as the "Conversion Rate" of such series. (B) AUTOMATIC CONVERSION. Each share of Series A Preferred Stock shall automatically be converted into shares of Common Stock at its then effective Conversion Rate immediately upon the transfer of ownership by the initial holder to a third party which is not an Affiliate of such holder. For purposes hereunder, 2. "Affiliate shall mean a party that, directly or indirectly, through one or more intermediaries, controls or is controlled by such holder. (C) MECHANICS OF CONVERSION. Each holder of Series A Preferred Stock who desires to convert the same into shares of Common Stock pursuant to this Section 5 shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or any transfer agent for the Series A Preferred Stock, and shall give written notice to the Corporation at such office that such holder elects to convert the same; provided, however, that in the event of an automatic conversion pursuant to Section 5(B), the outstanding shares of Series A Preferred Stock shall be converted automatically without any further action by the holder of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent, and provided further that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless the certificates evidencing such shares of Series A Preferred Stock are delivered to the Corporation or its transfer agent as provided herein. Such notice shall state the number of shares of Series A Preferred Stock being converted. Thereupon, the Corporation shall promptly issue and deliver at such office to such holder a certificate or certificates for the number of shares of Common Stock to which such holder is entitled and shall promptly pay in cash or, to the extent sufficient funds are not then legally available therefor, in Common Stock (at the Common Stock's fair market value determined by the Board of Directors as of the date of such conversion), any declared and unpaid dividends on the shares of Series A Preferred Stock being converted. Such conversion shall be deemed to have been made at the close of business on the date of such surrender of the certificates representing the shares of Series A Preferred Stock to be converted, or in the case of automatic conversion on the date of transfer to the new holder, and the person entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock on such date. (D) ADJUSTMENT FOR SUBDIVISIONS AND COMBINATIONS. If the Corporation shall at any time or from time to time after the date that the first share of Series A Preferred Stock is issued (the "Original Issue Date") effect a subdivision of the outstanding Common Stock, the Conversion Price in effect immediately before that subdivision shall be proportionately decreased. Conversely, if the Corporation shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock into a smaller number of shares, the Series A Conversion Price in effect immediately before the combination shall be proportionately increased. Any adjustment under this Section 5(D) shall become effective at the close of business on the date the subdivision or combination becomes effective. 3. (E) ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. If the Corporation at any time or from time to time after the Original Issue Date makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, in each such event the Conversion Price that is then in effect shall be decreased as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Conversion Price then in effect by a fraction (1) the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (2) the denominator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price shall be adjusted pursuant to this Section 5(d) to reflect the actual payment of such dividend or distribution. (F) ADJUSTMENT FOR OTHER DIVIDENDS AND DISTRIBUTIONS. If the Corporation at any time or from time to time after the Original Issue Date makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, in each such event provision shall be made so that the holders of the Series A Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of other securities of the Corporation which they would have received had their Series A Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 5 with respect to the rights of the holders of the Series A Preferred or with respect to such other securities by their terms. (G) ADJUSTMENT FOR RECAPITALIZATIONS, ETC. If at any time or from time to time after the Original Issue Date, the Common Stock issuable upon the conversion of the Series A Preferred Stock is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 5 or in Section 3), in any such event each holder of Series A Preferred shall have the right thereafter to convert such stock into the kind and amount of stock and other securities and property receivable upon such 4. recapitalization, reclassification or other change by holders of the maximum number of shares of Common Stock into which such shares of Series A Preferred could have been converted immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof. SECTION 6. REACQUIRED SHARES. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Restated Certificate of Incorporation, or in any other Certificate of Designation creating a series of Preferred Stock or any similar stock or as otherwise required by law. SECTION 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the Corporation shall give each holder of shares of Series A Preferred Stock notice of such transaction and the details of such exchange at least fifteen days before the closing of such transaction, and each such holder shall have the right to convert such shares of Series A Preferred Stock into shares of Common Stock of the Corporation prior to such closing, or to receive in such transaction the amount of the liquidation preference set forth in Section 3, in the form of the other stock or securities, cash and/or other property as is received by the holders of the Common Stock. IN WITNESS WHEREOF, the undersigned have executed this certificate as of December 28, 1994. /s/ Richard L. Casey --------------------------------------- Richard L. Casey President and Chief Executive Officer /S/ JOHN H. NEWMAN --------------------------------------- John H. Newman Secretary 5. EX-10.32 3 EXHIBIT 10.32 EXHIBIT 10.32 Confidential Treatment Requested COLLABORATION AGREEMENT THIS COLLABORATION AGREEMENT is made effective as of the 30th day of December, 1994 (the "Effective Date") by and between SCIOS NOVA INC., a Delaware corporation having its principal place of business at 2450 Bayshore Parkway, Mountain View, California 94043 ("Scios Nova") and GENENTECH, INC., a Delaware corporation having its principal place of business at 460 Point San Bruno Boulevard, South San Francisco, California 94080 ("Genentech"), each on behalf of itself and its Affiliates. Scios Nova and Genentech are sometimes referred to herein individually as a "Party" and collectively as the "Parties," and references to "Scios Nova" and "Genentech" shall include their respective Affiliates. RECITALS 1. Scios Nova is currently developing a natriuretic peptide designated as Auriculin-Registered Trademark- anaritide acetate for use in the treatment, prevention and diagnosis of acute renal failure. 2. Genentech has expertise in the area of development and marketing of bio-pharmaceutical products and is currently researching and developing natriuretic peptide products. 3. Scios Nova desires to grant to Genentech, and Genentech desires to obtain, rights to co-promote Auriculin in the United States and Canada and to develop and market Auriculin in the rest of the world, all on the terms and conditions set forth herein. 4. If the development of Auriculin in the United States is successful, the Parties desire to include in the collaboration certain additional natriuretic peptide products of Genentech and Scios Nova for acute renal failure, all on the terms and conditions set forth herein. 5. Simultaneously with the execution of this Agreement, Genentech will purchase shares of Preferred Stock of Scios Nova for an aggregate purchase price of $20 million and will agree to loan to Scios Nova an additional $30 million, all according to the terms and conditions of a Preferred Stock Purchase Agreement and Note Agreement of even date herewith. ARTICLE 1. DEFINITIONS The following terms shall have the following meanings as used in this Agreement: 1.1 "ADMINISTRATION COSTS" shall have the meaning defined in Exhibit A. 1.2 "AFFILIATE" means an entity that, directly or indirectly, through one or more intermediaries, is controlled by Scios Nova or Genentech. As used herein, the term "control" will mean the direct or indirect ownership of fifty percent (50%) or more of the stock having the right to vote for directors thereof or the ability to otherwise control the management of the corporation or other business entity. 1. 1.3 "ALLOCABLE OVERHEAD" shall have the meaning defined in Exhibit A. 1.4 "AURICULIN" means that certain natriuretic peptide product more particularly described on Exhibit B attached hereto. 1.5 "COLLABORATION PRODUCT" means (a) Auriculin-Registered Trademark-, initially, (b) Natrecor-Registered Trademark-, as and to the extent provided in Section 2.7 below, and (c) as and to the extent provided in Sections 2.2 and 2.4 below, those additional Genentech Products and Scios Nova Products that may hereafter be brought within the collaboration established under this Agreement in accordance with the procedure in such Sections 2.2 and 2.4, all within the Field unless specified to be outside the Field. 1.6 "COMMERCIALIZATION PLAN" means the comprehensive plan for the commercialization of a Collaboration Product, as more specifically described in Section 5.2. 1.7 "CONTROL" means possession of the ability to grant a license or sublicense as provided for herein without violating the terms of any agreement or other arrangement with any Third Party. 1.8 "COMBINATION PRODUCT ADJUSTMENT" means the following: in the event a Collaboration or Independent Product is sold in the form of a combination product containing one or more active ingredients in addition to a Collaboration or Independent Product, Royalty-Bearing Sales or Net Sales for such combination product will be adjusted by multiplying actual Royalty-Bearing Sales, or Net Sales as applicable, of such combination product by the fraction A/(A + B) where A is the invoice price of the Collaboration Product, or Independent Product as applicable, if sold separately, and B is the invoice price of any other active component or components in the combination, if sold separately. If, on a country-by-country basis, the other active component or components in the combination are not sold separately in said country, Royalty-Bearing Sales or Net Sales shall be calculated by multiplying actual Royalty-Bearing Sales or Net Sales of such combination product by the fraction A/C where A is the invoice price of the Product if sold separately, and C is the invoice price of the combination product. If, on a country-by-country basis, neither the Product nor the other active component or components of the combination product is sold separately in said country, Royalty-Bearing Sales or Net Sales shall be determined by the Parties in good faith. In any event, however, the Royalty- Bearing Sales or Net Sales of a combination product shall not be reduced by more than 50% from the actual sales of such Product by reason of the adjustment provisions contained herein. 1.9 "CO-PROMOTE" means to promote jointly Collaboration Products through Genentech, Scios Nova and their respective sales forces under a single trademark in a given country in the Co-Promotion Territory. 1.10 "CO-PROMOTION TERRITORY" means the United States and Canada. 1.11 "COST OF GOODS SOLD" in the Co-Promotion Territory shall have the meaning defined in Exhibit A and in the Licensed Territory, shall mean the fully burdened cost of the 2. Collaboration Product in bulk form. The fully burdened cost of the Collaboration Product will be determined in accordance with generally accepted accounting principles in the United States as applied by the Party performing or contracting for each stage of the bulk manufacturing process and will include direct labor, material, product testing costs and Allocable Overhead. 1.12 "DEVELOPMENT COSTS" in the Co-Promotion Territory shall have the meaning defined in Exhibit A and in the Licensed Territory, shall mean costs, including Allocable Overhead, required to obtain the authorization and/or ability to manufacture, formulate, fill, ship and/or sell a Collaboration Product in the Field in commercial quantities in the Licensed Territory. Development Costs shall include but are not limited to the cost of studies on the toxicological, pharmacokinetic, metabolic or clinical aspects of a Collaboration Product conducted internally or by individual investigators, or consultants necessary for the purpose of obtaining and/or maintaining approval of a Collaboration Product in the Field by a government organization in a country of the Licensed Territory, and costs for preparing, submitting, reviewing or developing data or information for the purpose of submission to a governmental authority to obtain and/or maintain approval of a Collaboration Product in the Field in a country of the Licensed Territory. In addition, Development Costs in the Licensed Territory shall include the cost of post- launch clinical studies in support of a Collaboration Product in the Field in the Licensed Territory. Development Costs in the Licensed Territory shall include expenses for compensation, benefits and travel and other employee- related expenses, as well as data management, statistical designs and studies, document preparation, and other expenses associated with the clinical testing program. 1.13 "DEVELOPMENT PLAN" means the comprehensive plan for the development of Collaboration Products, designed to generate the preclinical, clinical and regulatory information required for filing Drug Approval Applications in the Co- Promotion Territory, as more specifically described in Section 4.2 below. Development shall refer to all activities related to preclinical testing, toxicology, formulation, process development, manufacturing scale-up, quality assurance/quality control, clinical studies and regulatory affairs for a Collaboration Product in connection with obtaining Regulatory Approvals of such Products. 1.14 "DISTRIBUTION COSTS" shall have the meaning defined in Exhibit A. 1.15 "DRUG APPROVAL APPLICATION" means an application for Regulatory Approval required for commercial sale or use of a Product as a drug in the Field in a regulatory jurisdiction. 1.16 "FIELD" means the treatment, prevention or diagnosis, in humans, of acute renal failure from any cause whatsoever, whether primary or secondary to another medical condition. 1.17 "GENENTECH KNOW-HOW" means Information which (i) Genentech discloses to Scios Nova under this Agreement and (ii) is within the Control of Genentech. Notwithstanding anything herein to the contrary, Genentech Know-how shall exclude Genentech Patents. 3. 1.18 "GENENTECH PATENT" means the rights granted by any governmental authority under a Patent which covers a method, apparatus, material, manufacture, use, treatment, process, compound, composition, or product-by- process useful in the Field, which Patent is owned or Controlled by Genentech, including its interest in any Patents owned jointly by the Parties as provided hereunder. 1.19 "GENENTECH PRODUCT" means any Product researched or developed by or on behalf of Genentech. Genentech will be the Lead Party for all Collaboration Products that were initially Genentech Products. 1.20 "GROSS SALES" shall have the meaning defined in Exhibit A. 1.21 "INDEPENDENT PRODUCT" means (i) any Scios Nova Product or Genentech Product as to which the other Party's rights under Section 2.2 or 2.4 have expired or (ii) any Collaboration Product for which a Party has terminated its participation in development pursuant to Section 4.5 hereunder. 1.22 "INFORMATION" means techniques and data relating to the Field, including, but not limited to, inventions, practices, methods, knowledge, knowhow, skill, experience, test data including pharmacological, toxicological and clinical test data, analytical and quality control data, marketing, pricing, distribution, cost, sales, manufacturing, patent data or descriptions. 1.23 "JOINT COMMERCIALIZATION COMMITTEE" OR "JCC" means that Operating Committee established pursuant to Section 3.3 below. 1.24 "JOINT DEVELOPMENT COMMITTEE" OR "JDC" means that Operating Committee established pursuant to Section 3.2 below. 1.25 "JOINT FINANCE COMMITTEE" OR "JFC" means that Operating Committee established pursuant to Section 3.4 below. 1.26 "LEAD PARTY" means Scios Nova, for Scios Nova Products, and Genentech, for Genentech Products. 1.27 "LICENSED TERRITORY" means worldwide, excluding the Co-Promotion Territory. 1.28 "MAJOR EUROPEAN COUNTRY" means [ ]. 1.29 "MANAGEMENT COMMITTEE" means that committee established pursuant to Section 3.1 below. 1.30 "MARKETING ACTIVITIES" means the advertising, marketing and promotion of Collaboration Products, and related professional education, through any proper means, including, without limitation, (i) advertisements appearing in journals, newspapers, magazines or other 4. media, including direct mail and electronic media, (ii) seminars and conventions, (iii) sample packages of Collaboration Products, promotional literature, visual aids, three dimensional promotional items, and other selling materials, (iv) market research, (v) symposia and opinion leader development activities, (vi) pharmacoeconomics, and (vii) reimbursement planning and management (including uninsured patients programs if adopted by the Parties); PROVIDED, HOWEVER, that such term shall exclude direct sales force activity. Any Marketing Activities undertaken prior to Regulatory Activities must be permitted by the applicable laws and regulations of the applicable country. 1.31 "MARKETING COSTS" shall have the meaning defined in Exhibit A. 1.32 "NATRECOR" means that certain natriuretic peptide Product more particularly described on Exhibit C attached hereto. 1.33 "NET SALES" shall have the meaning defined in Exhibit A. 1.34 "NON-NATRIURETIC PRODUCT" means any form or dosage of a compound for human pharmaceutical use for which there is a Phase III Decision Date by [ ], for the same indication or indications in the Field as a Collaboration Product is being developed or commercialized hereunder as of such Phase III Decision Date. 1.35 "OPERATING COMMITTEE" means a committee established by the Management Committee, including, but not limited to, the Joint Development Committee, Joint Commercialization Committee and Joint Finance Committee. 1.36 "OPERATING PROFITS OR LOSSES" shall have the meaning defined in Exhibit A. 1.37 "PATENT" means (i) valid and enforceable letters patent, including any extension, registration, confirmation, reissue, continuation, division, continuation-in-part, re-examination or renewal thereof and (ii) pending applications for letters patent. 1.38 "PATENT COSTS" means the fees and expenses paid to outside legal counsel and experts, and filing and maintenance expenses, incurred after the Effective Date in connection with the establishment and maintenance of rights under Patents covering any Collaboration Product, including costs of patent interference, reexamination, reissue, opposition and revocation proceedings. 1.39 "PHASE II CLINICAL TRIAL" means such studies in humans of the safety, dose ranging and efficacy of a Product which have generated sufficient data to commence Phase III Clinical Trials. 1.40 "PHASE III CLINICAL TRIAL" means a controlled study in humans of the efficacy and safety of a Product which is prospectively designed to demonstrate statistically whether the Product is effective for use in a particular indication in a manner sufficient to obtain regulatory 5. approval to market that Product and, in the case of Collaboration Products, which the Joint Development Committee designates as a Phase III Clinical Trial. 1.41 "PHASE III DECISION DATE" means the date [ ] after availability to the non-developing Party of a reasonably comprehensive summary of both efficacy and safety data from the completed Phase II Clinical Trials of the Product or Non-Natriuretic Product, as the case may be, in the Field. 1.42 "PRODUCT" means any form or dosage of a small molecule, peptide or protein compound for human pharmaceutical use that, no later than [ ], has been synthesized and shown to produce biological activity from direct signalling through the guanylate cyclase A receptor. Products include candidate compounds and the results of research by either Party designed to identify Products. 1.43 "REGULATORY APPROVAL" means any approvals (including pricing and reimbursement approvals), licenses, registrations or authorizations of any federal, state or local regulatory agency, department, bureau or other governmental entity, necessary for the manufacture and sale of Products in a regulatory jurisdiction. 1.44 "ROYALTY-BEARING SALES" means the gross amount invoiced (a) by Genentech or its permitted sublicensees for sales to an unrelated Third Party of a Collaboration Product in the Licensed Territory or (b) by either Party or its permitted sublicensees for sales to an unrelated Third Party of an Independent Product in any country in the world, less (i) trade, cash and quantity discounts or rebates (provided that any such adjustments based on overall purchases by the customer of the selling Party may be included in the allowance determination only to the extent of the pro rata amount of such adjustments attributable to the products included in such overall purchase), (ii) credits or allowances given or made for rejection or return of, and for uncollectible amounts on, previously sold products or for retroactive price reductions (including rebates similar to Medicare), (iii) taxes, duties or other governmental charges levied on or measured by the billing amount, as adjusted for rebates and refunds, (iv) charges for freight and insurance directly related to the distribution of Products (to the extent not paid by the Third Party customer), and (v) credits or allowances given or made for wastage replacement, indigent patient and similar programs, and adjusted by the Combination Product Adjustment, if applicable. 1.45 "SALES COSTS" shall have the meaning defined in Exhibit A. 1.46 "SALES REPRESENTATIVE" means an employee of either Party or its Affiliates (i) who is responsible for contacting customers and others who can buy or influence the buying decision on the applicable Collaboration Product in the applicable country in the Co-Promotion Territory, and (ii) whose success at such activities is a significant factor in the ongoing employment of the individual, and shall exclude an employee of either Party or an Affiliate engaged in telemarketing, professional education, and similar indirect activities in support of direct selling. 6. 1.47 "SALES TARGETS" means the aggregate target of Gross Sales for a Party for a defined time period, as determined by the JCC pursuant to Section 5.3(a) below. 1.48 "SCIOS NOVA KNOW-HOW" means Information which (i) Scios Nova discloses to Genentech under this Agreement and (ii) is within the Control of Scios Nova. Notwithstanding anything herein to the contrary, Scios Nova Know-how shall exclude Scios Nova Patents. 1.49 "SCIOS NOVA PATENT" means the rights granted by any governmental authority under a Patent which covers a method, apparatus, material, manufacture, use, treatment, process, compound, composition or product-by- process useful in the Field, which Patent is owned or Controlled by Scios Nova, including its interest in any Patents owned jointly by the Parties as provided hereunder. 1.50 "SCIOS NOVA PRODUCT" means (a) Auriculin-Registered Trademark-, initially, (b) Natrecor-Registered Trademark-, as and to the extent provided in Section 2.7 below and (c) any Product researched or developed by or on behalf of Scios Nova. Scios Nova will be the Lead Party (unless otherwise provided) for all Collaboration Products that were initially Scios Nova Products. 1.51 "SUBLICENSE REVENUES" means all revenues received from Third Parties as consideration for sublicensing of the manufacture, distribution, use or sale of Collaboration Products in the Co-Promotion Territory. 1.52 "THIRD PARTY" means any entity other than Scios Nova or Genentech. 1.53 "THIRD PARTY ROYALTIES" means royalties payable to a Third Party in connection with Products. ARTICLE 2. SCOPE OF COLLABORATION 2.1 INITIAL PRODUCTS. Each of the Parties has carried on research and development with respect to natriuretic peptides that are Products, and the Parties have established this collaboration to develop such Products in the Field. The Parties will focus their initial efforts on the development of Auriculin in the Field. With respect to Products other than Auriculin, each Party developing such other Products (a "developing Party") wishes to grant to the other Party (a "non-developing Party") the right to elect to bring into the collaboration any Product of the developing Party, subject to the terms and conditions of this Agreement. Subject to such terms and conditions, each Party has the right to continue, at its own expense and discretion, its research and development programs with respect to natriuretic peptides. 2.2 AURICULIN NDA NOT FILED BY DECEMBER 31, 1997. If, by December 31, 1997, Scios Nova has not filed an NDA for Auriculin for the treatment of acute renal failure or if within sixty (60) days of such filing the FDA has not accepted for review an NDA which was filed by December 31, 1997, Genentech may, in its sole discretion, elect one of the following options: 7. (i) Genentech may elect to extend to [ ] the period of time in which Scios Nova may file for purposes of Section 2.4 below, an NDA for Auriculin for the treatment of acute renal failure; (ii) Genentech may elect to cause Scios Nova to bring into the collaboration for the Field any other Scios Nova Product, or to bring into the collaboration for the Field any Genentech Product, and such Products(s) shall thereafter be a "Collaboration Product" for purposes of this Agreement; or (iii) Genentech may elect to terminate this Agreement as provided in Section 15.2(b). Such election must be made by Genentech within sixty (60) days of the later of (A) December 31, 1997 if Scios Nova has not filed an NDA for Auriculin by such date or (B) the date upon which Scios Nova notifies Genentech that the FDA has not accepted for review an NDA filed by December 31, 1997. If no election is made prior to the end of such election period, this Agreement shall terminate automatically pursuant to Section 15.2(b). In addition, Genentech's right to include Scios Nova Products hereunder shall terminate in its entirety on [ ]. 2.3 MUTUAL AGREEMENT TO TERMINATE AURICULIN DEVELOPMENT. If the Parties mutually agree that the development of Auriculin in the Field should be discontinued prior to December 31, 1997, the Parties shall endeavor to select either a Scios Nova Product or a Genentech Product to be developed by Scios Nova as the first Collaboration Product. If, within sixty (60) days of such decision to discontinue development of Auriculin, the Parties are not able to agree on another product to develop, then Genentech shall have the rights under Section 2.2. 2.4 AURICULIN NDA FILED BY DECEMBER 31, 1997. If, by December 31, 1997, Scios Nova has filed an NDA for Auriculin for the treatment of acute renal failure and the FDA has accepted such NDA for review within sixty (60) days of such filing, each Party shall thereafter have the right to require the other Party to contribute any or all of its Products, on a product-by-product basis, to the collaboration for use in the Field. Upon the exercise of such right by the non-developing Party as to a Product of a developing Party, such Product shall become a Collaboration Product for all purposes of this Agreement. Such right as to a Product may be exercised by providing written notice to the developing Party at any time after such FDA acceptance of an Auriculin NDA and prior to the Phase III Decision Date; PROVIDED, HOWEVER, that if Genentech has commenced Phase III trials of any Genentech Product in the Field prior to FDA acceptance of an NDA for Auriculin filed before December 31, 1997, Scios Nova shall have ninety (90) days from the date of such FDA acceptance within which to make the Product Election as to such first Genentech Product. In addition, each Party's right to include the other Party's Products hereunder shall terminate in its entirety on [ ]. 8. 2.5 DEVELOPMENT COSTS. (a) Scios Nova shall bear all Development Costs for development of the first Collaboration Product for marketing in the Field in the Co-Promotion Territory through the date of Regulatory Approval of the first Collaboration Product in the United States, and the Parties shall share Development Costs incurred thereafter in the manner set forth in this Agreement. All Development Costs of any other Collaboration Product incurred pursuant to an approved Development Plan for such Collaboration Product shall be shared by the Parties in the Co-Promotion Territory in the manner set forth in this Agreement; PROVIDED, HOWEVER, that no payment from Genentech to Scios Nova shall be made until a Collaboration Product receives Regulatory Approval for sale in the United States. Subject to the foregoing, the Development Costs of the Product in the Co-Promotion Territory that were incurred after commencement of the IND- enabling toxicology studies for the Product through the date the Product is brought into the collaboration shall be charged to the collaboration as described on Exhibit A upon election to bring a Product into the collaboration; PROVIDED, HOWEVER, that if Genentech elects to bring in a Genentech Product pursuant to Section 2.2(ii), such Development Costs shall not be charged to the collaboration. (b) In no instance, however, shall either Party be obligated to fund development of more than one (1) Collaboration Product in the Co-Promotion Territory at any one time. (c) If Genentech elects to bring a Scios Nova Product into the collaboration pursuant to Section 2.2, Scios Nova may elect to continue to develop Auriculin in the Co-Promotion Territory at its own expense. Notwithstanding Section 2.4(a), Genentech shall in no event be required to bear, or reimburse Scios Nova for, any Development Costs incurred with respect to such development of Auriculin after the date of Genentech's election under Section 2.2. 2.6 INDEPENDENT PRODUCT. If a Party does not elect to include a Product pursuant to Section 2.2 or 2.4 prior to the Phase III Decision Date of that Product in the Field, the non-developing Party's right to include such Product as a Collaboration Product hereunder shall terminate and such Product shall be deemed an Independent Product herein. Thereafter, the developing Party may, in its sole discretion and at any time, continue or discontinue the development and commercialization of the Independent Product at its own expense. The developing Party shall have a worldwide, exclusive license (with right of sublicense), under the non-developing Party's Patents and Know-how and in the Field, to develop, make, have made, use, sell, offer for sale, have sold and import such Independent Product. In the event the developing Party commercializes an Independent Product, the developing Party shall pay the other Party a royalty on Royalty-Bearing Sales for such Independent Product under Section 7.5(c). 9. 2.7 UNDERSTANDINGS RELATING TO NATRECOR. (a) RIGHT TO COLLABORATE INSIDE THE FIELD. Pursuant to Section 2.2(ii), Genentech shall have the right to include Natrecor as a Collaboration Product in the Field; PROVIDED, HOWEVER, that such right shall not be exercisable at any time after [ ] Genentech may exercise such right by delivering written notice to Scios Nova. Upon such exercise, the Parties shall collaborate for the development and commercialization of Natrecor as provided herein; PROVIDED, HOWEVER, that the development of Natrecor in the Field shall not adversely affect the development and commercialization of Natrecor outside the Field so long as Scios Nova is developing Natrecor in any indication or the Parties agree to collaborate with respect to Natrecor in such other indications pursuant to Section 2.7(b). Subject to Section 2.5, at the time of Genentech's notice of its exercise of rights hereunder, the Development Costs for Natrecor shall be allocated and charged to the collaboration as provided in Exhibit A. (b) [ ] (c) COVENANT REGARDING DEVELOPMENT IN THE FIELD. During the term of this Agreement, Scios Nova shall not, without the prior written consent of Genentech, (i) conduct, cause any Third Party to conduct or knowingly permit any licensee of Scios Nova to conduct a human clinical trial within the Field with respect to Natrecor, (ii) publish any data from any human clinical trial which would promote Natrecor for use in the Field or otherwise promote Natrecor for use in the Field through publications, symposia, advertising or the like or (iii) knowingly furnish Natrecor to any Third Party for such purposes. Scios Nova will include a covenant to such effect in any Third Party license of any of its rights to Natrecor. 2.8 NON-NATRIURETIC PRODUCTS. (a) Neither Party shall commercialize, directly or indirectly, any Non-Natriuretic Product in the Field prior to December 31, 1997 without first offering to the other Party the opportunity to negotiate a collaboration with respect to such Non-Natriuretic Product for use in the Field under this Agreement. If, by [ ], Scios Nova has filed an 10. NDA for Auriculin for the treatment of acute renal failure and the FDA has accepted such NDA for review within sixty (60) days of such filing, the Parties shall continue to be bound until [ ] to such obligation to first offer the other Party an opportunity to negotiate a collaboration with respect to use in the Field of any Non-Natriuretic Product that has reached a Phase III Decision Date by [ ]. If, by December 31, 1997, Scios Nova has not filed such an NDA or if within sixty (60) days of such filing the FDA has not accepted for review an NDA which was filed by December 31, 1997, Scios Nova shall continue to be bound until [ ] to such obligation to first offer Genentech an opportunity to negotiate with Scios Nova a collaboration with respect to the use in the Field of any Scios Nova Non-Natriuretic Product that has reached a Phase III Decision Date by [ ]. (b) The Party desiring to commercialize such a Non-Natriuretic Product shall notify the other Party in writing and provide the other Party with copies of all data relating to such Non-Natriuretic Product then held by the commercializing Party. The other Party shall have thirty (30) days after receipt of such data in which to give the commercializing Party written notice if the other Party desires to exercise its right of first negotiation with respect to such Non-Natriuretic Product. If the non-commercializing Party fails to notify the commercializing Party within such period, the right of first negotiation under this Section 2.8(b) with respect to such Non-Natriuretic Product shall terminate, and the non-commercializing Party shall have no interest in or right to such Non-Natriuretic Product. If the non- commercializing Party gives the commercializing Party timely notice of its exercise of its right of first negotiation, the Parties shall negotiate exclusively and in good faith for a period of up to ninety (90) days from receipt of such data the terms for a collaboration on such Non-Natriuretic Product inside the Field. If the Parties fail to reach agreement during such a period, the commercializing Party shall have the right to enter into a collaboration or license agreement with any Third Party or commercialize the Non-Natriuretic Product itself and the non-commercializing Party shall have no interest in or right to such Non-Natriuretic Product. 2.9 NO LICENSE. Except as otherwise provided herein, Scios Nova shall not license, sublicense or otherwise transfer its rights in the Field under any Scios Nova Patents, Scios Nova Know-how, Genentech Patents or Genentech Know-how with respect to any Scios Nova Product, and Genentech shall not license, sublicense or otherwise transfer its rights in the Field under any Scios Nova Patents, Scios Nova Know-how, Genentech Patents or Genentech Know-how with respect to any Genentech Product in the Co-Promotion Territory, until such time as the other Party's rights to such Genentech Product or Scios Nova Product, as appropriate have terminated; PROVIDED, HOWEVER, that the developing Party shall have the right to license or sublicense such rights for the purposes of manufacturing a Product. 2.10 INFORMATION. In order to keep each Party informed about the development of additional Products, each Party agrees to provide the other Party, for so long as the other Party has a prospective right under this Article 2 with respect to that Product, with a semi-annual written report on the status, results and plans for development of each Genentech Product or Scios Nova Product, as appropriate. In addition, each Party shall present to the other Party, the results of its Phase II Clinical Trials with such additional Product. Each Party shall also provide the other from time to time with such information as the other Party may reasonably request to 11. evaluate any additional Product. If a Party is considering the exercise of any of its rights hereunder with respect to the other Party's Product, it may request from the other Party a good faith estimate of Development Costs incurred to date with respect to such Product, and the other Party shall provide such estimate within thirty (30) days of receipt of such request. ARTICLE 3. MANAGEMENT OF THE COLLABORATION 3.1 MANAGEMENT COMMITTEE. (a) Within thirty (30) days of the Effective Date, the Parties will establish a Management Committee to oversee and manage the collaboration in the Co-Promotion Territory contemplated by this Agreement. The Management Committee will be composed of two representatives appointed and replaced by Scios Nova and two representatives appointed and replaced by Genentech. Such representatives will be senior officers and/or managers of their respective companies who do not simultaneously sit on an Operating Committee. The Management Committee will meet at least once each calendar quarter, or more frequently, as agreed by the Management Committee, and will operate by consensus. If the Management Committee is unable to resolve a dispute regarding any issue presented to it, such dispute shall be resolved in accordance with Article 17 below. (b) The Management Committee shall perform the following functions: (i) determine the overall strategy for the collaboration in the manner contemplated by this Agreement; (ii) coordinate the activities of the Parties hereunder; (iii) establish a governance structure for the collaboration including overseeing the establishment and organization of one or more Operating Committees, or other structures to implement this Agreement. The establishment of certain Operating Committees is provided for in Sections 3.2, 3.3 and 3.4 of this Agreement. Each Operating Committee contemplated by this Agreement shall be subordinate to the Management Committee. If any Operating Committee contemplated by this Agreement is not constituted or continued, any reference to such Committee in this Agreement shall be deemed to be a reference to the Management Committee or such other committees or structures to which the Management Committee may delegate responsibility; (iv) settle disputes or disagreements that are unresolved by an Operating Committee unless otherwise indicated in this Agreement; (v) approve any agreements with Third Parties to be made by either or both Parties regarding a Collaboration Product and which have a value in excess of $[ ] or which involve the license of any rights related to the development, manufacture or marketing 12. of a Collaboration Product in the Co-Promotion Territory (except as otherwise expressly provided in this Agreement); (vi) review and approve each Development Plan, including each annual update, submitted to it pursuant to Section 4.2; (vii) review and approve each Commercialization Plan, including each annual update, submitted to it pursuant to Section 5.2; and (viii) perform such other functions as appropriate to further the purposes of this Agreement as determined by the Parties. 3.2 JOINT DEVELOPMENT COMMITTEE. (a) Within thirty (30) days of the Effective Date, the Parties will establish the Joint Development Committee to oversee and control development of Collaboration Products in the Co-Promotion Territory and in the Field. The JDC will be composed of two representatives appointed and replaced by each of Scios Nova and Genentech. Such representatives will include individuals with expertise and responsibilities in the areas of preclinical development, clinical development, process sciences, manufacturing or regulatory affairs. The JDC will meet at least once each calendar quarter, or more frequently, as agreed by the JDC. The JDC will operate by consensus. If the JDC is unable to resolve a dispute regarding any issue presented to it, such dispute shall be resolved in accordance with Article 17 below. (b) The JDC shall coordinate, expedite and control the development of Collaboration Products to obtain Regulatory Approvals in the Co-Promotion Territory as set forth in Article 4. The JDC will develop and recommend to the Management Committee Development Plans (including annual development budgets), will determine which Collaboration Products (other than Auriculin) will be developed, will facilitate the flow of information with respect to development work being conducted for each Collaboration Product on a worldwide basis, and will discuss and cooperate regarding such worldwide development. (c) The JDC shall also be the forum for exchange of information on Scios Nova Products and Genentech Products that have not yet become Collaboration Products. (d) The JDC shall have no involvement in the development of Independent Products, which shall be solely the responsibility of the developing Party, or in the development of Collaboration Products in the Licensed Territory, which shall be the responsibility of Genentech, subject to the terms and conditions of this Agreement. (e) The JDC will cease operations and have no further function hereunder on the later of (i) the date on which the Parties are no longer developing any Collaboration Product in the Co-Promotion Territory or (ii) [ ]. 3.3 JOINT COMMERCIALIZATION COMMITTEE. 13. (a) Within thirty (30) days after the availability of data from Scios Nova's Phase III trial for Auriculin currently in progress as of the Effective Date, the Parties will determine whether to establish the Joint Commercialization Committee. When established, the JCC shall be composed of two representatives appointed and replaced by each of Scios Nova and Genentech. The JCC will be an operational committee made up of individuals with expertise and responsibilities in the areas of product development and marketing, sales management or market research. The JCC will meet on a quarterly basis, except that from submission of an NDA for a Collaboration Product in the Co-Promotion Territory until the end of the second year of sales in the Co-Promotion Territory, the JCC shall meet every two (2) weeks to prepare for and oversee the launch of Collaboration Products. The JCC will operate by consensus. If the JCC is unable to resolve a dispute regarding any issue presented to it, such dispute shall be resolved in accordance with Article 17 below. (b) The purposes of the JCC shall be to (i) monitor, review and direct the commercialization of Collaboration Products in the Co-Promotion Territory pursuant to the Commercialization Plan, including oversight of planning, annual budgeting, manufacturing, marketing, sales and distribution, and licensing of Collaboration Products, (ii) in conjunction with the JFC monitor and review budgets and actual expenses incurred in the manufacture, marketing, sale and distribution of Collaboration Products, (iii) select trademarks for Collaboration Products (other than Auriculin or Natrecor) and (iv) facilitate cooperation regarding the worldwide commercialization and marketing activities of the Parties. (c) The JCC shall have no involvement in the commercialization of Independent Products, which shall be solely the responsibility of the marketing party, or in the commercialization of Collaboration Products in the Licensed Territory, which shall be the responsibility of Genentech, subject to the terms and conditions of this Agreement. (d) The JCC will cease operations and have no further function hereunder on the date on which the Parties are no longer sharing Operating Profits or Losses with respect to any Collaboration Product in the Co-Promotion Territory. 3.4 JOINT FINANCE COMMITTEE. (a) Within thirty (30) days of the Effective Date, the Parties will establish the Joint Finance Committee to be composed of two representatives appointed and replaced by each of Scios Nova and Genentech. Such representatives will include individuals with expertise and responsibilities in the areas of accounting, cost allocation, budgeting and financial reporting. The JFC will operate by consensus. If the JFC is unable to resolve a dispute regarding any issue presented to it, such dispute shall be resolved in accordance with Article 17 below. (b) The JFC shall operate under the direction of the Management Committee to provide services to and consult with the JDC and the JCC in order to address the financial, budgetary and accounting issues which arise in connection with each Development Plan and annual update thereto prepared pursuant to Section 4.2 and each Commercialization Plan and 14. annual update thereto prepared pursuant to Section 5.2. The JFC's functions shall include the functions described in Exhibit A. (c) The JFC shall have no involvement in the development of Independent Products, which shall be solely the responsibility of the developing Party, or in the development of Collaboration Products in the Licensed Territory, which shall be the responsibility of Genentech, subject to the terms and conditions of this Agreement. (d) The JFC will cease operations and have no further function hereunder on the date on which the Parties are no longer sharing Operating Profits or Losses with respect to any Collaboration Product in the Co-Promotion Territory. 3.5 COLLABORATION CHAIRPERSON. Within sixty (60) days of the Effective Date, Scios Nova shall designate a Collaboration Chairperson for Auriculin, subject to Genentech's consent, and thereafter the Lead Party shall designate a Collaboration Chairperson for its Collaboration Products within sixty (60) days after such Collaboration Product is contributed to the collaboration, as provided in Section 2.2 or 2.4. Such Collaboration Chairperson shall be a vice president, unless otherwise agreed, and shall serve as an ex-officio member of the Management Committee and each Operating Committee and shall be entitled to call and take minutes of meetings of each Committee. ARTICLE 4. DEVELOPMENT IN THE CO-PROMOTION TERRITORY 4.1 DEVELOPMENT EFFORTS. Scios Nova and Genentech each agree to collaborate diligently in the development of Collaboration Products in the Field and to use commercially reasonable and diligent efforts to develop and bring Collaboration Products to market in the Field as soon as practicable. The Parties further agree to execute and substantially perform the Development Plan and to cooperate with the other in carrying out the Development Plan. As used in this Agreement, the term commercially reasonable and diligent efforts will mean those efforts consistent with the exercise of prudent scientific and business judgment, as applied to other pharmaceutical products of similar potential and market size by the Party in question. 4.2 DEVELOPMENT PLAN. (a) The development of each Collaboration Product in the Co- Promotion Territory shall be governed by a comprehensive Development Plan. The Lead Party shall prepare the Development Plan, in consultation with the JFC as to financial, budgetary and accounting issues, and in accordance with its customary standard for a product of market significance comparable to that of the Collaboration Product in question, taking into consideration factors such as market conditions, regulatory factors, competition, and the costs and profits of the Product in question. Scios Nova has prepared, and Genentech has reviewed and approved, the Development Plan for Auriculin; the JDC or Management Committee may hereafter modify such Development Plan as provided in this Agreement. As to all other Collaboration Products, within ninety (90) days after selection for development by the JDC as provided in Section 3.2, the Lead Party shall 15. submit its proposed Development Plan to the JDC and the Management Committee for approval or modification. Thereafter, each Development Plan shall be updated annually by the Lead Party, in consultation with the JFC as to financial, budgetary and accounting issues, and submitted to the JDC and Management Committee for review, modification and approval not later than ninety (90) days prior to January 1 of a calendar year hereunder. Each Development Plan will be subject to JDC and Management Committee approval and neither Party may proceed with development of a Collaboration Product without such JDC and Management Committee approval. During the applicable calendar year, any Development Plan may be modified by the Lead Party, in consultation with the JFC with respect to financial, budgetary and accounting issues, PROVIDED, HOWEVER, that any modification shall be subject to the approval of the JDC and Management Committee. (b) Each Development Plan shall describe the proposed overall program of development for the Collaboration Product, including preclinical studies, toxicology, formulation, process development, manufacturing scale-up, quality assurance/quality control, clinical studies and regulatory plans and other key elements of obtaining Regulatory Approval in the Co-Promotion Territory. The Development Plan shall include a summary of estimated Development Costs of the program expected during the development process through obtaining Regulatory Approval for each proposed indication and a detailed and specific plan and budget for all development activities proposed for the following calendar year for the Collaboration Product. (c) The JDC shall determine whether the Phase II data are sufficient to enable the Parties to begin a Phase III Clinical Trial of a Collaboration Product in the Co-Promotion Territory. If the JDC determines the Phase II data are sufficient, it shall determine a budget for the Phase III Clinical Trials, in consultation with the JFC and subject to the approval of the Management Committee. Each Party shall have thirty (30) days from the date on which the Management Committee approves such Phase III budget in which to determine whether it intends to participate in developing the applicable Collaboration Product through such Phase III Clinical Trials. If a Party so elects to participate in Phase III Clinical Trials, it shall bear one-half of the Development Costs set forth in such Development Plan regardless of whether it later decides to terminate participation in such Phase III Clinical Trials (unless otherwise provided in Section 2.5). This Section 4.2(c) shall not apply to the development of Auriculin. 4.3 DRUG APPROVAL APPLICATIONS. Consistent with the Development Plan, the Lead Party shall file Drug Approval Applications and seek Regulatory Approvals for Collaboration Products in the Co-Promotion Territory. Prior to submitting any Drug Approval Applications, the Parties, through the JDC, shall consult, cooperate in preparing and mutually agree on such Applications and their content and scope. The Lead Party shall own all regulatory submissions including all Drug Approval Applications for Collaboration Products in the Co-Promotion Territory and the other Party shall have a permanent and irrevocable right of access and reference thereto, with appropriate notification of such right to the applicable regulatory authorities. The other Party shall have the right to make any other use of the Drug Approval Application that it would normally make had it been a joint owner. The Parties will endeavor to include on all package labels and inserts for Collaboration Products sold in the Co-Promotion Territory the 16. names and logos of Scios Nova and Genentech with equal prominence, to the extent permitted by the applicable regulatory authorities. 4.4 TERMINATION AND CONTINUING OBLIGATION FOR FUNDING DEVELOPMENT COSTS. (a) Except as provided in Section 4.5 below, effective upon thirty (30) days notice, either Party may elect to terminate (or elect not to participate in) the development and commercialization of any Collaboration Product in the Co-Promotion Territory at any time before Regulatory Approval for sale therein and thereby terminate its responsibility for bearing further Development Costs, and any other responsibilities, for such Collaboration Product, as specified herein. In the event a Party gives a notice of termination under this Section 4.5, the terminating Party (i) shall remain responsible for its share of Development Costs for the Collaboration Product in the Co-Promotion Territory in the Field until either (A) the effective date of the termination or (B) if such effective date of termination occurs after the decision of the JDC to undertake a specific Phase III Clinical Trial, through completion of such Phase III Clinical Trials as determined in Section 4.2(c) above, and (ii) shall make its personnel and other resources available to the other Party as necessary to effect an orderly transition of development responsibilities, with the costs of such personnel and resources to be borne by the other Party after the effective date of the termination. If a Party elects not to continue paying Development Costs for a Product, monies previously paid for such Development Costs shall not be refunded. (b) As of the effective date of any such termination, the Collaboration Product that is the subject of the termination shall become an Independent Product, the terminating Party shall no longer have any right in the Co-Promotion Territory under the non-terminating Party's Patents and Know-how with respect to such Independent Product and the non-terminating Party shall have the exclusive right (with right of sublicense) in the Co-Promotion Territory under the terminating Party's Patents and Know-how and in the Field, to develop, make, have made, use, sell, offer for sale, have sold and import such Independent Product. In the event the non-terminating Party commercializes an Independent Product, the non-terminating Party shall pay the terminating Party a royalty on Royalty-Bearing Sales for such Independent Product under Section 7.5(d) or (e). (c) Notwithstanding any decision of Scios Nova to opt out of development of Natrecor in the Field, Scios Nova shall have the right to continue to manufacture Natrecor so long as it continues to develop or commercialize Natrecor outside the Field and fulfills its commitment to supply Genentech with reasonable quantities of Natrecor for use in the Field as provided in Article 8. 4.5 TERMINATION WITH RESPECT TO AURICULIN. (a) If, at any time prior to January 1, 1998, either (i) Scios Nova believes that the development of Auriculin should be discontinued and Genentech believes such development should be continued, and/or (ii) Scios Nova does not desire to develop Natrecor in the Field and Genentech desires to have Natrecor developed in the Field, the Parties shall attempt to resolve such dispute in accordance with Section 17.1. If the CEOs are unable to agree on whether to 17. discontinue such development after full discussion by the JDC and the Management Committee, either Party may invoke the special arbitration mechanism in this Section 4.5 by providing written notice to the other Party. (b) Within fifteen (15) days after receipt of such notice, each Party shall select a nephrologist with expertise in acute renal failure and experience in drug development, which nephrologists shall select a third nephrologist with expertise in acute renal failure and experience in drug development within fifteen (15) days of their selection. The Parties shall have thirty (30) days in which to submit to such panel of nephrologists such data and information as each Party believes necessary for the panel to make the determinations described in (c) and (d) below. The panel shall, within thirty (30) days after receipt of such information, hold a joint meeting with the Parties and render a decision in writing solely on the questions of whether there is sufficient data to support continued development of Auriculin and/or Natrecor. (c) If the panel decides that there is sufficient data suggesting that continued development of Auriculin as a product in the Field is warranted, Scios Nova shall continue such development in the Field in the Co-Promotion Territory, in accordance with the Development Plan to be reviewed by the JDC and reviewed and approved by the Management Committee, until the earlier of (i) the completion of the second Phase III Clinical Study of Auriculin in the Field in the United States, or (ii) December 31, 1997. Thereafter, pursuant to Section 4.4 above, Scios Nova will have the right to terminate development and commercialization of Auriculin in the Field and Genentech will have the right to independently develop and commercialize Auriculin in the Field as an Independent Product, subject to the royalty obligation for such Independent Product under Section 7.5(d) or (e) and any other obligations regarding an Independent Product set forth herein. (d) If the panel decides that there is not sufficient data to continue development of Auriculin, but determines that there is sufficient data suggesting that Natrecor should be developed as a product in the Field, Scios Nova shall thereafter develop Natrecor in the Field in the Co-Promotion Territory, in accordance with a Development Plan to be reviewed by the JDC and reviewed and approved by the Management Committee until the earlier of (i) the completion of a Phase II Clinical Trial (for the purposes of this Section 4.5 only, a Phase II Clinical Trial shall mean such studies in humans of the efficacy and safety of a Product which is designed to generate sufficient data to commence Phase III Clinical Trials) or (ii) December 31, 1997. Thereafter, pursuant to Section 4.4 above, Scios Nova will have the right to terminate development and commercialization of Natrecor in the Field and Genentech will have the right to independently develop and commercialize Natrecor in the Field as an Independent Product, subject to the royalty obligation for such Independent Product under Section 7.5(d) or (e) and any other obligations regarding an Independent Product set forth therein. (e) If the panel decides that there is not sufficient data to develop either Auriculin or Natrecor in the Field, Scios Nova will have the right to terminate development and commercialization of Auriculin and Natrecor in the Field and Genentech will have the right to independently develop and commercialize Auriculin and Natrecor in the Field as an Independent Product, subject to the royalty obligation for such Independent Products. 18. (f) The decisions of the panel shall be binding on the Parties and neither Party shall have the right to invoke Section 17.2 with respect to the issues decided by the panel. Costs of the panel shall be borne equally. ARTICLE 5. COMMERCIALIZATION IN THE CO-PROMOTION TERRITORY 5.1 COMMERCIALIZATION EFFORTS. Scios Nova and Genentech each agree to (i) collaborate diligently in the commercialization of the Collaboration Products and (ii) use commercially reasonable and diligent efforts to commercialize the Products promptly and in such a manner as to maximize Operating Profits. The Parties shall be guided by a standard of [] ] striving to balance as best they can the legitimate interests and concerns of the Parties and to realize the economic potential of the Collaboration Products. In conducting commercialization activities under this Agreement, neither Party shall significantly prejudice the value of a Collaboration Product by reason of its activities outside of the Field, although neither Party shall be prohibited from exercising any election provided in this Agreement. In conducting commercialization activities under this Agreement, neither Party shall permit its own tax considerations to affect Operating Profits or Losses negatively, except to the extent such tax considerations are equally applicable to both Parties. 5.2 COMMERCIALIZATION PLAN. (a) The commercialization of each Collaboration Product in the Co- Promotion Territory shall be governed by a comprehensive Commercialization Plan. The Lead Party or, in the case of the First Collaboration Product, Genentech, shall develop prior to launch and for the first two (2) years thereafter, in consultation with the JFC with respect to financial, budgetary and accounting issues, an initial Commercialization Plan in accordance with its customary standard for a product of market significance comparable to that of the Collaboration Product in question, taking into consideration factors such as market conditions, regulatory factors, competition and the costs and profits of the Product in question. Each Party agrees to consult and work with the other Party to develop mutually agreed Commercialization Plans. The Lead Party or Genentech, as provided herein, shall submit the Commercialization Plan to the JCC for review and to the Management Committee for review and approval no later than six (6) months after the time of filing for Regulatory Approval in any country in the Co-Promotion Territory. Thereafter, each Commercialization Plan shall be updated annually by the Lead Party or Genentech, as provided herein, in consultation with the JFC with respect to financial, budgetary and accounting issues, and submitted to the JCC and the Management Committee for review and approval not later than ninety (90) days prior to January 1 of a calendar year hereunder. Each Commercialization Plan will be subject to JCC and Management Committee approval within thirty (30) days after such submission. Neither Party may proceed with the commercialization of a Collaboration Product without such JCC and Management Committee approval. During the applicable calendar year, any Commercialization Plan may be modified by the Lead Party or Genentech, as provided herein, in consultation with the JFC with respect to financial, budgetary and accounting issues, 19. PROVIDED, HOWEVER, that any modification shall be subject to the approval of the JCC and Management Committee. (b) Each Commercialization Plan as approved by the JCC and Management Committee shall describe the overall plan for commercializing the applicable Collaboration Product. Each such Commercialization Plan shall include (i) Marketing Activities, (ii) a comprehensive marketing, sales, pricing, manufacturing, distribution and licensing strategy for the applicable Collaboration Product in all applicable countries, including the Third Parties to be utilized and the arrangements with them that have been or are proposed to be agreed upon (including policies and procedures for adjustments, rebates, bundling and the like), (iii) estimated launch date, market and sales forecasts, in units of product and local currency, and competitive analysis for the applicable Collaboration Product, and (iv) a detailed budget of the Marketing Costs and Sales Costs to be incurred prior to launch of the Collaboration Product in the Co-Promotion Territory. Prior to such launch of the applicable Collaboration Product, the Commercialization Plan shall be updated by the Lead Party or Genentech, as provided herein, in consultation with the JFC with respect to financial, budgetary and accounting issues, and approved by the JCC and Management Committee to include (A) updated market and sales forecasts in units of Collaboration Product and local currency (including monthly sales forecasts), (B) each Party's Sales Target under the Plan and (C) a detailed budget for the costs to be incurred in connection with performing such Plan. 5.3 SALES EFFORTS IN THE CO-PROMOTION TERRITORY. (a) As part of the Commercialization Plan for the Co-Promotion Territory for each year, the JCC and Management Committee shall determine the targeted level of Gross Sales of the applicable Collaboration Product for the calendar year covered by such Plan and the targeted level of Gross Sales for each potential market or account (I.E.,group purchasing organizations, managed care organizations, tertiary care hospitals, primary care hospitals, etc.), taking into account the relative difficulty of selling into such market or account and the relative potential of each such market or account. The JCC and Management Committee shall also include in the Commercialization Plan each Party's Sales Target for such markets, based on each Party's agreed level of Sales Target as set forth in Section 5.3(b) below, and shall review and approve each Party's annual budget for Sales Costs. The Parties agree to allocate such markets and accounts in an unbiased manner based on objective, quantifiable information and market research data with the objectives of allocating to each Party markets and accounts from which each such Party will have the opportunity to attain its Sales Target and of maximizing Operating Profits. Notwithstanding the commercially reasonable and diligent efforts of the Parties to effect an objective allocation of individual accounts and markets between the Parties, the Parties recognize that it may be necessary from time to time for the JCC to reassign individual accounts in order to give each Party responsibility for a set of accounts or markets that in the aggregate represent the targeted market opportunity for each Party. The JCC shall review the allocation of accounts not more frequently than once per year and at the end of the year. All adjustments by the JCC in the allocation of accounts shall be made as quickly as practicable with a view to minimizing the dislocation of employees of a Party or their incentives, such as by making the 20. minimum number of adjustments and making adjustments with respect to accounts primarily when turnover occurs in the field representatives for such account. (b) [ ] shall have the obligation to attain [] ] of the total Sales Target for each Collaboration Product in the Co- Promotion Territory for each Plan year, PROVIDED, HOWEVER, in the first two (2) years of commercial sales of the first Collaboration Product Scios Nova will have the right to select an obligation for (i) [ ], (ii) [] ] or (iii) [ ] of the targeted level of Gross Sales and Genentech will provide the remainder of the targeted level of Gross Sales in such years. Scios Nova shall notify Genentech no later than one (1) month after submission of an NDA for such Collaboration Product in the Co-Promotion Territory (provided that Genentech has submitted and the JCC has reviewed an initial Commercialization Plan no later than sixty (60) days before the NDA filing) of what level of the targeted level of Gross Sales Scios Nova intends to commit for the first two (2) years after launch. (c) After the first two years after the commercial introduction of a Collaboration Product, if either Party fails to achieve its Sales Target with respect to a Collaboration Product in a country in the Co-Promotion Territory, the Parties will meet to discuss the circumstances giving rise to the shortfall. Thereafter, if a Party does not achieve at least [ ] of its Sales Target (as set forth in the applicable Commercialization Plan) in a given calendar year, there shall be no adjustment to such Party's share of Operating Profits or Losses for the first such occurrence. Thereafter, if a Party does not achieve at least [ ] of its Sales Target in any calendar year, Operating Profits or Losses for such year shall be allocated (i) [ ] to the performing Party and [ ] to the under-performing Party if the under-performing party achieves at least [ ] of its Sales Target in such year and (ii) [ ] to the performing Party and [ ] to the under-performing Party if the under-performing Party achieves less than [ ] of its Sales Target in such year. Such adjustment to Operating Profits or Losses shall be the performing Party's sole and exclusive remedy with respect to the under-performing Party's failure to achieve its Sales Target in such year so long as the under-performing Party's efforts have been made in good faith. If both Parties underperform in any year, there shall be no automatic adjustment and the Parties shall meet to discuss in good faith whether there should be an adjustment to the division of Operating Profits or Losses. (d) The Parties shall recover their Sales Costs in accordance with Exhibit A. The JCC, in consultation with the JFC, will determine appropriate mechanisms to optimize Operating Profits from sales of Collaboration Products in other countries in the Co-Promotion Territory in light of the Parties' respective resources at the time. (f) To the extent not prohibited under agreements with Third Party suppliers, each Party shall make available to the other Party information concerning its systems and methods for distribution, marketing and sales management. The Lead Party shall endeavor to adopt systems and methods which optimize the commercialization of each Collaboration Product and are convenient to the other Party. If the Lead Party elects to adopt all or part of a system 21. of the other Party, then the other Party shall provide (to the extent it is contractually able to do so) all software and information and reasonably assist the Lead Party to implement such system. If Scios Nova so adopts a system from Genentech, then Scios Nova shall have the right to use it in marketing any of its products outside of the collaboration. 5.4 RIGHT TO ENGAGE THIRD PARTIES. If a Party determines that it needs promotion support to achieve its Sales Target under the applicable Commercialization Plan and the other Party does not provide it, then such Party may, at its cost and with the approval of the JCC and the Management Committee, contract for additional promotion support from a Third Party. Any other use of Third Parties such as the sublicensing of Third Parties with respect to Co- Promotion must be approved by the JCC and the Management Committee. 5.5 SALES AND DISTRIBUTION. Unless otherwise agreed, the Lead Party shall have the sole responsibility with respect to the following (PROVIDED, HOWEVER, that Genentech shall have the sole responsibility with respect to the following in the first two (2) years after launch of the first Collaboration Product if Scios Nova elects not to supply [ ] of the targeted level of Gross Sales in such years as provided in Section 5.3(b)): (a) Booking sales for and distributing the Collaboration Products for which it is acting as Lead Party. If the other Party receives any orders for such Products, it shall refer such to the Lead Party. The Parties agree that within the Co-Promotion Territory, no Collaboration Product will be bundled with any other pharmaceutical product marketed by a Party for the benefit of such other product. (b) Handling all returns of the Collaboration Products for which it is acting as Lead Party. If such a Product is returned to the other Party, it shall promptly be shipped to the facility responsible for shipment of such Product in the country in question to the attention of the Returned Goods Department or another location as may be designated by the Lead Party. (c) Handling all recalls of the Collaboration Products for which it is acting as Lead Party. The other Party will make available to the Lead Party, upon request, all of its pertinent records which the Lead Party may reasonably request to assist the Lead Party in effecting any recall. (d) Handling all aspects of order processing, invoicing and collection, Product distribution, inventory and receivables, and collection of data of sales to hospitals and other end users (E.G., DDD data). 5.6 MARKETING AND PROMOTIONAL MATERIALS. All marketing and promotional materials related to Collaboration Products shall be prepared by the Lead Party, or Genentech, in the case of the first Collaboration Product, prior to launch and for the first two (2) years thereafter, subject to review and approval by the JCC. The Lead Party shall be entitled to select any Third Parties involved in the preparation of such materials, subject to JCC approval as part of determining the annual budget under the Commercialization Plan. With respect to written and visual promotional or educational materials, to the extent such materials identify or otherwise make reference to 22. either of the Parties, Scios Nova and Genentech shall both be presented and described with equal prominence and emphasis as having joined and participated in the development and joint commercialization of the applicable Collaboration Product, as permitted by the applicable laws and regulations of each country in which such materials are to be presented. All documentary information, promotional material and oral presentations (where practical) regarding the detailing and promoting of Collaboration Products shall state this arrangement and display the names and logos of Scios Nova and Genentech with equal prominence. 5.7 TRAINING PROGRAM. Genentech shall develop training programs relating to the Collaboration Products for the sales forces of each respective Party and for any Third Parties engaged in selling or promotion, and shall assign responsibility to itself, the other Party or a Third Party for the preparation of materials and conduct of training. The Parties agree to utilize such training programs on an ongoing basis to assure a consistent, focused promotional strategy. The initial training shall be carried out at a time which is mutually acceptable to the Parties, and which is prior to but reasonably near the date on which Regulatory Approval is expected. As additional members are added to the Parties' respective sales forces, training will be given to groups of the newly selected members. ARTICLE 6. DEVELOPMENT AND COMMERCIALIZATION IN LICENSED TERRITORY 6.1 DEVELOPMENT EFFORTS. Genentech will use commercially reasonable and diligent efforts to select Collaboration Products for development and to develop each Collaboration Product, including pursuing preclinical development and clinical development of such Collaboration Product and obtaining Regulatory Approvals therefor in all countries in the Licensed Territory, taking into account the scientific and commercial potential of such Collaboration Products, including, without limitation, each of the potential indications in the Field for such Products. 6.2 DEVELOPMENT MILESTONES FOR THE LICENSED TERRITORY. In any event, and unless the Parties otherwise agree in writing, all of Genentech's rights as to the Licensed Territory under this Agreement shall, at Scios Nova's option, be converted to a non-exclusive license if Genentech fails to file a Drug Approval Application for Auriculin with the Committee for Proprietary Medicinal Products ("CPMP"), (or if the CPMP is not operative at such time with the appropriate regulatory authorities in two Major European Countries), within one year of the filing of an NDA in the United States for Auriculin that the FDA has accepted, PROVIDED, HOWEVER, that if Genentech demonstrates that the CPMP or such regulatory authorities require a substantially different data package than that submitted with such NDA, the Parties will discuss in good faith an extension to such deadline, but in no event (other than force majeure event as provided in Section 18.4) shall such deadline be extended beyond the first anniversary of receipt of Regulatory Approval of Auriculin in the United States. 6.3 DEVELOPMENT MILESTONES FOR JAPAN. Prior to the [ ] of receipt of the data from Scios Nova's current Phase III Clinical Trial, Genentech shall provide Scios Nova with written notice as to whether Genentech intends to develop and market Auriculin in Japan 23. and if so, also provide its proposed development and commercialization strategy for Auriculin in Japan. If Genentech notifies Scios Nova that it does not intend to develop and market Auriculin in Japan or fails to provide notice that it is proceeding, Genentech's rights under this Agreement will terminate as to Japan effective upon receipt of such notice. If Genentech notifies Scios Nova that it does intend to develop and market Auriculin in Japan, it shall use commercially reasonable and diligent efforts to execute substantially the development strategy and associated development plan for Auriculin in Japan, unless the applicable regulatory authorities require additional pre-clinical and clinical studies or the like. In addition, on or before January 1 of each year thereafter, Genentech shall provide to Scios Nova a status report and updated development plan for Auriculin in Japan. The Parties intend that the development plan will become more detailed as Genentech develops Auriculin in Japan. This Section 6.3 shall be in addition to the general diligence obligation set forth in Section 6.1 which shall not be affected hereby. 6.4 MARKETING EFFORTS. Genentech will use commercially reasonable and diligent efforts to commercialize each Collaboration Product that receives Regulatory Approval in each country in which such approval is granted, taking into account the scientific and commercial potential for such Collaboration Product, including without limitation each of the potential indications therefor. 6.5 MARKETING MILESTONES. (a) If Genentech fails to make its first commercial sale of a Collaboration Product in a particular country in the Licensed Territory within a [ ] period after Genentech has received Regulatory Approval in that country, then, at Scios Nova's election, Genentech's rights under this Agreement with respect to such Collaboration Product shall become non-exclusive in that country. Such rights shall become nonexclusive immediately upon receipt of written notice from Scios Nova. (b) If Genentech fails to make its first commercial sale of a Collaboration Product in two Major European Countries within a [ ] period after Genentech has received Regulatory Approval of such Collaboration Product in each such Major European Country, then, at Scios Nova's election, Genentech's rights under this Agreement with respect to such Collaboration Product shall become non-exclusive as to the Licensed Territory. Such rights shall become non-exclusive immediately upon receipt of written notice from Scios Nova. (c) In any event, and unless the Parties otherwise agree, Genentech's rights under this Agreement will become non-exclusive if Genentech fails to pay Scios Nova aggregate royalties under Section 7.5(a) as to Scios Nova Products of at least [ ] for the Licensed Territory in any calendar year after the fourth calendar year following the first commercial sale of a Collaboration Product in any Major European Country; PROVIDED, HOWEVER, that Net Sales in the United States of such Collaboration Product(s) equal or exceed [] ] in such calendar year (net of Third Party royalty offsets provided in Sections 9.6 and 12.5). Such rights shall become non-exclusive immediately upon receipt of written notice from Scios Nova. 24. (d) Genentech's obligations under this Section 6.5 shall be extended or abated to the extent that any failure to perform such marketing milestone is delayed or prevented primarily because of (i) any material failure of Scios Nova, its licensees or suppliers to perform hereunder, (ii) an action of Scios Nova, its licensees or suppliers which causes such failure, (iii) the revocation of the applicable Regulatory Approval outside of Genentech's control or (iv) a legal prohibition from marketing imposed by a competent authority in the applicable jurisdiction. (e) Effective upon the conversion of any of Genentech's rights to non-exclusive, Scios Nova and its sublicensees shall have a permanent and irrevocable right of access and reference to all regulatory submissions including all Drug Approval Applications and Regulatory Approvals for the Collaboration Product or Products and in such country or countries as to which Genentech's rights have become non-exclusive, and Genentech shall notify the applicable regulatory authorities no later than thirty (30) days thereafter. If such right of access and reference is not sufficient to permit Scios Nova or its sublicensees to file Drug Approval Applications and receive Regulatory Approval for the sale of the applicable Collaboration Product in the applicable country, Genentech shall, within sixty (60) days of receipt of notice from Scios Nova, provide Scios Nova with the complete data package that Genentech used in such regulatory submissions in order to allow Scios Nova or its sublicensees to file such Drug Approval Applications in its own name. 6.6 DEVELOPMENT COSTS, MARKETING COSTS AND COST OF GOODS SOLD. Genentech shall bear all Development Costs and Marketing Costs related to the development and commercialization of the Collaboration Products in the Licensed Territory. Development Costs and Marketing Costs which are used in both the Licensed Territory and Co-Promotion Territory shall be allocated as described in Exhibit A. Genentech will also have the obligations with respect to the manufacture and purchase of Collaboration Products, as provided in Article 8 below. 6.7 COOPERATION ON DEVELOPMENT AND MARKETING EFFORTS. To facilitate cooperation between the Parties on the worldwide development and marketing of Collaboration Products, Genentech shall prepare and submit to the JDC or JCC, as appropriate, and the Management Committee for review and comment a status report of Genentech's development and commercialization plans and programs for each Collaboration Product. Such status report shall be submitted to the JDC and Management Committee (a) with respect to Auriculin, within ninety (90) days after the JDC and Management Committee determine to proceed with filing an NDA in the Co-Promotion Territory and (b) with respect to other Collaboration Products, within ninety (90) days after the JDC and Management Committee have selected a Collaboration Product for development as provided in Section 3.2. Thereafter, Genentech shall submit a revised and updated development and commercialization status report to the JDC or JCC, as appropriate, and the Management Committee at least semi-annually so long as such Collaboration Product remains under development or is being marketed in the Licensed Territory. Genentech shall consider in good faith any comments made by Scios Nova in connection with such reports, but shall not be required to incorporate such comments into the development and commercialization plan. Genentech will provide a written response with respect to any comments not incorporated in the revised development or commercialization plan. In addition, Genentech agrees to provide such 25. information regarding its development and marketing of Collaboration Products as Scios Nova may reasonably request. ARTICLE 7. MILESTONES, PROFIT SHARING AND ROYALTIES 7.1 MILESTONE PAYMENTS. (a) Genentech shall make the following payments to Scios Nova, within 30 days after the first achievement of each of the milestones by Auriculin: MILESTONE PAYMENT NDA approval in the Field and in the United States $30.0 million Upon Royalty-Bearing Sales in the Licensed Territory [ ] (excluding Japan) of [ ] in any 12 month period Upon Regulatory Approval in Japan [ ] Once each such milestone has been paid, Genentech shall have no obligation to make the analogous milestone payment under Section 7.1(b). (b) If a Collaboration Product that is a Scios Nova Product other than Auriculin first meets any of the following milestones, then the remaining milestone payments under Section 7.1(a) shall no longer apply and Genentech shall make the following milestone payments to Scios Nova, within 30 days after the first achievement of each of the milestones by such other Scios Nova Product. MILESTONE PAYMENT NDA approval in the Field and in the United States [ ] Upon Royalty-Bearing Sales in the Licensed Territory [ ] (excluding Japan) of [ ] in any 12 month period Upon Regulatory Approval in Japan [ ] 26. If each such milestone is subsequently met by Auriculin, then and only then, Genentech shall pay again the milestones set forth in this Section 7.1(b) within 30 days after the achievement of each of the milestones by Auriculin. 7.2 SHARE OF OPERATING PROFITS OR LOSSES. Scios Nova and Genentech shall share in Operating Profits or Losses from sales of Collaboration Products in the Co-Promotion Territory as provided in Exhibit A. 7.3 TERM OF OPERATING PROFITS OR LOSSES. The Parties shall share Operating Profits or Losses hereunder in the Co-Promotion Territory until the Parties mutually agree to terminate the collaboration in the Co-Promotion Territory or as provided in Section 7.4 below. 7.4 SALE OR PURCHASE OF CO-PROMOTION RIGHTS. (a) Either Party may, by written notice by certified mail, return receipt requested, to the other Party (the "Auction Notice"), indicate a single price (the "Auction Price") at which such Party (the "Offering Party") would be willing to sell all of its rights hereunder with respect to the Collaboration Products in the Co-Promotion Territory (the "Sales Option") or purchase from the other Party all of the rights held by such other Party hereunder with respect to the Collaboration Products in the Co-Promotion Territory (the "Purchase Option"). This right will be exercisable at any time after the tenth anniversary of the first commercial sale in the Co-Promotion Territory of the first Collaboration Product or earlier, if (i) a single stockholder or group of affiliated stockholders who would be required to file a Schedule 13D under the Securities Act of 1934, as amended, acquires voting stock of Scios Nova so that its total holdings of such stock equal or exceed [ ] of the then outstanding voting stock of Scios Nova, or (ii) a Third Party acquires all or substantially all of the assets of Scios Nova, in which case Genentech must exercise such right with ninety (90) days after the date on which such stockholder or group of stockholders passes the [] ] threshold or the date of such acquisition. Scios Nova shall promptly notify Genentech of such event. The Auction Price may be in the form of (i) cash, (ii) a royalty on sales of the Collaboration Product(s) in the Co-Promotion Territory or (iii) some combination of the foregoing. (b) Within ninety (90) days of receipt of the Auction Notice, the Party receiving such notice (the "Receiving Party") shall notify the Offering Party in writing whether it elects to exercise the Sales Option or the Purchase Option; PROVIDED, HOWEVER, if the Receiving Party does not notify the Offering Party of its election within such period, the Receiving Party shall be deemed to have elected to the Sales Option and thereby to have sold its rights hereunder with respect to the Collaboration Products in the Co-Promotion Territory. If the Offering Party has not received a response from the Receiving Party within seventy (70) days after the Offering Party sends its initial notice hereunder, the Offering Party shall on the seventieth (70th) day after sending such initial notice, deliver a second notice by certified mail, return receipt requested. (c) On that date which is ninety (90) days after receipt of notification pursuant to Section 7.4(b), 27. (i) if the Sales Option was elected (or deemed to be elected) pursuant to Section 7.4(b), all rights held by the Offering Party hereunder with respect to the Collaboration Products in the Co-Promotion Territory shall terminate and the Receiving Party shall pay the Offering Party [ ] of the Auction Price that is payable in cash on such date; (ii) if the Purchase Option was elected pursuant to Section 7.4(b), all rights held by the Receiving Party hereunder with respect to the Collaboration Products in the Co-Promotion Territory shall terminate and the Offering Party shall pay the Receiving Party [ ] of the Auction Price that is payable in cash on such date; (iii) the purchasing Party's rights under the selling Party's Patents and Know-how shall become exclusive (with right of sublicense) in the Field and in the Co-Promotion Territory and the selling Party's license under the purchasing Party's Patents and Know-how in the Field and in the Co-Promotion Territory shall terminate; and (iv) the selling Party shall use commercially reasonable and diligent efforts to transfer to the purchasing Party any technology, materials, data and regulatory submissions so as to fully enable the purchasing Party to develop and commercialize the Collaboration Products. The remaining [ ] of the Auction Price that is payable in cash shall be paid upon the earlier to occur of (A) thirty (30) days of the date thereafter on which the purchasing Party manufactures and sells any Collaboration Product in the Co- Promotion Territory or (B) the date on which such technology transfer is substantially complete. 7.5 ROYALTIES. (a) Genentech shall pay Scios Nova a royalty on Royalty-Bearing Sales of Collaboration Products that were initially Scios Nova Products in the Licensed Territory as follows: (i) the royalty rate shall be [ ] of the first [ ] of Royalty-Bearing Sales in the Licensed Territory in any calendar year, and (ii) the royalty rate shall be [] ] of Royalty-Bearing Sales on amounts exceeding [ ] of Royalty- Bearing Sales in the Licensed Territory in any calendar year. (b) Genentech shall pay Scios Nova a royalty of [ ] on Royalty-Bearing Sales in the Licensed Territory of Collaboration Products that were initially Genentech Products. (c) If either Party commercializes an Independent Product pursuant to Section 2.6, it shall pay the other Party a royalty of [ ] of Royalty-Bearing Sales of such Product if the manufacture, use or sale of such Product is covered by such other Party's Patent in the country of manufacture or sale, and [ ] of Royalty-Bearing Sales in such country, if not. (d) If either Party commercializes an Independent Product which has been converted from a Collaboration Product to an Independent Product pursuant to Section 4.5 hereof subsequent to the first Regulatory Approval for sale of a Collaboration Product, the 28. commercializing Party shall pay the terminating Party a royalty on Royalty- Bearing Sales of such Independent Product as follows: (i) if such termination is effective prior to the Phase III Decision Date, the royalty rate shall be [ ] of Royalty-Bearing Sales; and (ii) if such termination is effective on or after the Phase III Decision Date, the royalty rate shall be [ ] of the first [] ] of Royalty-Bearing Sales worldwide in any calendar year and [] ] of Royalty-Bearing Sales on amounts exceeding [ ] of Royalty-Bearing Sales worldwide in any calendar year; and (iii) notwithstanding Sections 7.5(d)(i) and (ii), if Scios Nova elects to terminate its participation with respect to any Genentech Product and such termination is effective prior to the Phase III Decision Date (A) the royalty rate in the Licensed Territory shall be [] ] of Royalty-Bearing Sales if the manufacture, use or sale of such Independent Product is covered by a Scios Nova Patent in the country of manufacture or sale or [ ] of Royalty-Bearing Sales if the manufacture, use or sale of such Independent Product is not covered by a Scios Nova Patent in such country and if Scios Nova bore one-half of the Development Costs for such Product through Phase II Clinical Trials and (B) the royalty rate in the Co-Promotion Territory shall be that rate otherwise provided for in Section 7.5(d)(i) or 7.5(d)(ii). (e) If either Party commercializes an Independent Product which has been converted from a Collaboration Product to an Independent Product pursuant to Section 4.5 hereof prior to the first Regulatory Approval for sale of a Collaboration Product, the commercializing Party shall pay the terminating Party a royalty on Royalty-Bearing Sales of such Independent Product as follows: (i) if such termination is effective prior to the Phase III Decision Date, the royalty rate shall be [ ] of Royalty-Bearing Sales; and (ii) if such termination is effective on or after the Phase III Decision Date, the royalty rate shall be [ ] on the first [] ] of Royalty-Bearing Sales worldwide in any calendar year and [ ] on amounts exceeding [ ] of Royalty-Bearing Sales in any calendar year; and (iii) notwithstanding Sections 7.5(e)(i) and (ii), if Scios Nova elects to terminate its participation with respect to any Genentech Product and such termination is effective prior to Phase III Decision Date (A) the royalty rate in the Licensed Territory shall be [] ] of Royalty-Bearing Sales if the manufacture, use or sale of such Independent Product is covered by a Scios Nova Patent in the country of manufacture or sale and [] ] of Royalty-Bearing Sales if the manufacture, use or sale of such Independent Product is not covered by a Scios Nova Patent in such country and if Scios Nova bore one-half of the Development Costs for such Product through Phase II Clinical Trials and (B) the royalty 29. rate in the Co-Promotion Territory shall be that rate otherwise provided for in Section 7.5(e)(i) or 7.5(e)(ii). 7.6 ROYALTY PAYMENT REPORTS. Royalty payments under this Agreement shall be made to the receiving Party or its designee quarterly within sixty (60) days following the end of each calendar quarter for which royalties are due from the selling Party. Each royalty payment shall be accompanied by a report summarizing the Royalty-Bearing Sales during the relevant three-month period. 7.7 TERM OF ROYALTY OBLIGATIONS. (a) Genentech shall pay royalties hereunder with respect to each Collaboration Product in each country until the later to occur of (i) the expiration of the last to expire of the Scios Nova Patents or Genentech Patents specifically covering the manufacture, use or sale of such Product in such country, or (ii) [ ] years from the date of first commercial sale in such country. In consideration of the assignment of trademark rights in the Licensed Territory, Genentech shall, in addition, thereafter pay a royalty of [] ] of Royalty-Bearing Sales of Auriculin or Natrecor, as applicable, until the date [ ] years from the date of the first commercial sale of Auriculin or Natrecor, as applicable, in such country. (b) The Parties shall pay royalties hereunder with respect to (x) each Independent Product which became an Independent Product pursuant to Section 2.6 above and (y) any Genentech Product which became a Collaboration Product pursuant to Section 2.2(ii) and which thereafter became an Independent Product pursuant to Section 4.4, in each country from the date of first commercial sale of any Collaboration Product until the first to occur of (i) the date on which neither Party is no longer selling any Collaboration Product hereunder or (ii) the later to occur of (A) the expiration of the last to expire of the Scios Nova Patents or Genentech Patents specifically covering the manufacture, use or sale of such Product in such country or (B) ten (10) years from the date of first commercial sale of such Product in such country. (c) The Parties shall pay royalties hereunder with respect to each Independent Product which became an Independent Product pursuant to Section 4.4 above (other than any Genentech Product which became a Collaboration Product pursuant to Section 2.2(ii) and which thereafter became an Independent Product pursuant to Section 4.4), in each country from the date of first commercial sale of such Independent Product until the later to occur of (i) the expiration of the last to expire of the Scios Nova Patents or Genentech Patents specifically covering the manufacture, use or sale of such Product in such country or (ii) [] ] years from the date of first commercial sale of such Product in such country. (d) Upon expiration of the royalty term for a Collaboration Product in a country as described above, the Party paying such royalties shall thereafter have a nonexclusive, paid-up license to make, use, sell, offer for sale, have sold and import that Collaboration Product in that country. 30. 7.8 TAXES. The Party receiving royalties shall pay any and all taxes levied on account of, or measured exclusively by, royalties it receives under this Agreement. If laws or regulations require that taxes be withheld, the selling Party will (i) deduct those taxes from the remittable royalty, (ii) timely pay the taxes to the proper taxing authority, and (iii) send proof of payment to the other Party within sixty (60) days following that payment. The selling Party agrees to take all lawful and reasonable efforts to minimize such taxes to the other Party. 7.9 BLOCKED CURRENCY. In each country where the local currency is blocked and cannot be removed from the country, at the election of the selling Party, royalties accrued in that country shall be paid to the receiving Party in the country in local currency by deposit in a local bank designated by the receiving Party. 7.10 FOREIGN EXCHANGE. For the purpose of computing Royalty-Bearing Sales for Products sold in a currency other than United States Dollars, such currency shall be converted into United States Dollars in accordance with such Party's customary and usual translation procedures consistently applied. 7.11 PAYMENTS TO OR REPORTS BY AFFILIATES. Any payment required under any provision of this Agreement to be made to either Party or any report required to be made by any Party shall be made to or by an Affiliate of that Party if designated by that Party as the appropriate recipient or reporting entity. 7.12 SALES BY SUBLICENSEES. In the event either Party grants licenses or sublicenses to others to make or sell Independent Products, or Genentech grants such rights with respect to sales of Collaboration Products in the Licensed Territory, such licenses or sublicenses shall include an obligation for the licensee or sublicensee to account for and report its Royalty-Bearing Sales of such Products on the same basis as if such sales were Royalty-Bearing Sales by the Party granting the license or sublicense, and such Party shall pay royalties to the Party receiving royalties under this Agreement as if the Royalty-Bearing Sales of the sublicensee were Royalty-Bearing Sales of the Party granting the license or sublicense. 7.13 SPILLOVER SALES. (a) For the purposes of this Section 7.13, the term "Spillover Sales" means [] ] (b) The Parties shall not be required hereunder to account for Spillover Sales unless and until (i) the first Collaboration Product has received Regulatory Approval for sale, (ii) a Product has received Regulatory Approval for sale in the same country and (iii) the Parties have established the existence for such Spillover Sales as provided in this Section 7.13. 31. (c) At any time after a Product has received Regulatory Approval for sale in a country in which a Collaboration Product has received such Approval in the Field, a Party may invoke this Section 7.13 by providing the other Party written notice and by requesting an initial study of Spillover Sales at the requesting Party's expense, based on data obtained from [] ] in the United States (and other countries to the extent that [] ] obtains data from such country). If such initial study discloses Spillover Sales of greater than [ ] of Gross Sales of Collaboration Products in that country, the requesting Party may proceed with an audit of Spillover Sales as provided in Section 7.13(d) below. (d) If following the initial study under Section 7.13(c) [ ] concludes that Spillover Sales may exceed [ ] of Gross Sales of Collaboration Products, then the requesting Party may invoke an audit of Spillover Sales by providing the other Party written notice and the results of the [ ] analysis. The audit will be performed by a market research organization other than [ ] that is selected by the JCC. If the JCC is unable to agree on a market research organization within thirty (30) days of such notice, then the selection shall be handled pursuant to Article 17 below. (e) The requesting Party shall bear the costs of the audit, unless the audit discloses Spillover Sales of greater than [ ] of Gross Sales of Collaboration Products, in which case the Party enjoying the net benefit from the Spillover Sales shall bear the costs. If the audit shows Spillover Sales of less than ten percent (10%), no further audit may be conducted for the next two calendar years. (f) The audit shall be performed according to a methodology that meets the criteria set forth on Exhibit D. In this regard, the Parties agree to define an exact audit methodology meeting such criteria starting approximately six (6) months after receipt of Regulatory Approval for sale of any Collaboration Product. Such methodology shall include the selection of the firm to conduct the audit, or designation of not more than three acceptable firms. If the Parties are unable to agree on such a methodology within twelve (12) months after receipt of such Regulatory Approval, each Party will appoint an expert and the experts will appoint a third expert. Each Party's expert will propose a methodology for the audit and the third expert will define the methodology to be used, which may or may not be the same methodology as proposed by either Party. In such event, each Party shall bear the fees and expenses of its own expert and the fees and expenses of the third expert shall be divided equally. (g) If the audit discloses Spillover Sales of greater than [ ] of Gross Sales of Collaboration Products, the Party selling the Product shall (i) pay a royalty of [ ] of the Spillover Sales in the Co-Promotion Territory to the collaboration (which shall be included as Other Operating Income/Expense) and (ii) pay a royalty of [] ] of the Spillover Sales in the Licensed Territory, all of which the recipient shall be entitled to retain; PROVIDED, HOWEVER, that to the extent that the Spillover Sales were made by third party licensee of a Party, that Party's royalty obligation under this clause (ii) shall be limited to the lesser of the Party's actual royalty receipts in the Field from its licensee(s) or [ ] of such licensee's Spillover Sales. 32. (h) If a Party selling a Product believes that Spillover Sales would be a negative number (i.e., that sales of the Collaboration Product outside of the Field for approved indications of the Product exceed sales of the Product within the Field), then it may invoke the same procedure outlined above, subject to the same rules regarding allocation of expense, the ability to proceed with an audit of Spillover Sales, and a royalty payable by the collaboration to the Party harmed by the Spillover Sales. ARTICLE 8. MANUFACTURE AND SUPPLY 8.1 PROCESS DEVELOPMENT, MANUFACTURING APPROVALS. Scios Nova will use commercially reasonable and diligent efforts, at its own expense, to develop a process for the manufacture of Auriculin and to scale up that process to a scale sufficient to manufacture and supply the anticipated demand for Auriculin in the United States at the time of NDA approval and in Europe at the time of CPMP approval (or equivalent) in Europe and at the time of Regulatory Approval in Japan. The continued development of the process for the manufacture of Auriculin as well as the scale up of that process and all material issues incident to the development of the ability to produce Auriculin for commercial purposes in sufficient quantity and in a timely manner will be within the purview of the Joint Development Committee. The costs associated with the development and scale up of a process to manufacture Auriculin for sale in the Co-Promotion Territory will be a Development Cost. Scios Nova will use its commercially reasonable and diligent efforts to make necessary filings to obtain, or to cause [ ] (pursuant to a Supply Agreement, dated March 21, 1994, between Scios Nova and [ (the "["] ] Agreement")), [ ] or any other Third Party supplier of Auriculin to make necessary filings to obtain, at Scios Nova's expense, Regulatory Approval for its part of the manufacture for sale of Auriculin in the Co-Promotion Territory as part of the approval of an NDA for Auriculin in the United States and the equivalent in Canada and to either make necessary filings to obtain, or cause [ ], [ ] or any other Third Party supplier of Auriculin to make necessary filings to obtain, Regulatory Approval for its part of the manufacture for sale of Auriculin in the countries in the Licensed Territory as part of the approval of Auriculin for use and sale in those countries. Scios Nova will provide, or will cause a Third Party supplier of Auriculin to provide, Genentech, at Genentech's expense, with all information that was used or intended to be used in regulatory submissions for Regulatory Approval for the sale of Auriculin and Scios Nova Products in the Licensed Territory or alternatively provide Genentech with right of reference to any filing with a Regulatory Authority which is necessary for approval. With respect to other Collaboration Products, the Lead Party (in the case of Scios Nova with respect to the Co-Promotion Territory and the Licensed Territory and in the case of Genentech with respect to the Co-Promotion Territory) shall have the same obligations and responsibilities described above with respect to each Collaboration Product for which it is a Lead Party. 8.2 MANUFACTURE AND SUPPLY OF PRODUCTS. (a) Scios Nova will use commercially reasonable and diligent efforts, pursuant to a Supply Agreement to be entered into between the Parties prior to 33. the date of the first submission by Genentech of an application or registration for Regulatory Approval for such Product in the Licensed Territory to manufacture Scios Nova Products and to supply Genentech in a timely manner with such quantities of Scios Nova Products in bulk form as Genentech may reasonably order from time to time for sale of such Scios Nova Products in the Licensed Territory. In addition, Scios Nova will use commercially reasonable and diligent efforts, pursuant to a Supply Agreement to be entered into between the Parties prior to the date of the first submission of an application for Regulatory Approval of such Product in the Co-Promotion Territory, to manufacture or have manufactured Scios Nova Products in finished form for sale in the Co-Promotion Territory and to supply in timely manner to that Party responsible for distributing the Product in the Co-Promotion Territory. (b) Genentech will use commercially reasonable and diligent efforts, pursuant to a Supply Agreement to be entered into between the Parties prior to the date of the first submission by Genentech of an application for Regulatory Approval for such Product in the Co-Promotion Territory, to manufacture Genentech Products for the sale of such Genentech Products in the Co-Promotion Territory and to supply them in a timely manner to that Party responsible for distributing the Product in the Co-Promotion Territory. 8.3 THIRD PARTY SUPPLY. (a) The Lead Party may contract with a Third Party for the manufacture and supply of all or any portion a Collaboration Product. In such event, the Lead Party shall notify the other Party in writing of its intention to contract with a Third Party for such supply. (b) During the sixty (60) day period following such notice from the Lead Party, the other Party shall have the right to decide to produce either itself and/or through a Third Party, that portion of the Collaboration Product for sale in the Licensed Territory that the Lead Party proposes to contract to a Third Party. If the other Party decides to produce such quantities of the Collaboration Product for sale in the Licensed Territory either itself and/or through a Third Party, it shall notify the Lead Party in writing of such during such sixty (60) day period. (c) In addition, during such sixty (60) day period, the other Party shall have the right to offer to produce itself that portion of the Collaboration Product for sale in the Co-Promotion Territory that the Lead Party proposes to contract to a Third Party. If the other Party decides to offer to produce that portion of the Collaboration Product for sale in the Co-Promotion Territory, it shall notify the Lead Party in writing of such during such sixty (60) day period and shall include with such notice the terms of its offer to produce the Collaboration Product for sale in the Co-Promotion Territory, including price, quantity, quality, and capacity. The Lead Party shall accept such offer if it is competitive with the terms a Third Party would be willing to offer. (d) In the event that the other Party exercises its rights to manufacture in the Licensed Territory, or in the event that the Lead Party accepts the non-Lead Party to supply for the Co-Promotion Territory, the Lead Party shall promptly provide free of charge (except for any of the Lead Party's reasonable out-of-pocket expense which shall be reimbursed to it) to the other Party and/or the Third Party all process and manufacturing technology in its possession and 34. reasonably necessary to enable the other Party concurrently to manufacture the Collaboration Product (subject to the assumption by such other Party of any obligations with any Third Party licensor). The other Party shall thereafter have a royalty-free, non-exclusive license to make and have made the Collaboration Product pursuant to this Agreement for sale in the Licensed Territory or the Co-Promotion Territory, as appropriate. The Lead Party shall provide reasonable assistance (to be mutually agreed to) to the other Party in such transfer with the goal of assuring that the needs of the Parties for a supply a Collaboration Product for preclinical studies, clinical trials and commercial sales are met in the applicable Territory. (e) If the other Party does not exercise its rights under this Section 8.3, or the Parties cannot agree on the terms of supply in the Co- Promotion Territory, and the Lead Party contracts out the supply of such to a Third Party, the Lead Party shall nevertheless remain responsible to the other Party for an adequate supply of Collaboration Product (subject to the provisions to this Agreement) at a cost which is comparable to that of products similar to the Collaboration Product. (f) This Section 8.3 shall not apply to the manufacture and supply of Auriculin pursuant to agreements with [ ] and [] ] or to the manufacture and supply of Natrecor pursuant to agreements in effect as of the date on which Natrecor is included as a Collaboration Product hereunder, subject to Section 2.7(a) above. 8.4 SPECIFICATIONS, COORDINATION WITH THIRD PARTY MANUFACTURERS OF AURICULIN. (a) The Parties agree that the manufacture of Collaboration Products and the production of Collaboration Products as finished product must be in full compliance with all aspects of current cGMPS for bulk product and final vial production and shall be subject to a joint audit by Scios Nova and Genentech (whether together or through a designee) of bulk drug manufacture, final drug manufacture including aseptic filling operations and analytical testing and the data resulting therefrom. In addition, the manufacture of Collaboration Products for supply to Genentech for sale in the Licensed Territory must be in full compliance with requirements in the various countries in the Licensed Territory. (b) If Genentech reasonably believes that a Third Party manufacturer of Auriculin is or will be unable to meet the supply schedule for Auriculin, it may so notify Scios Nova and Scios Nova will use commercially reasonable and diligent efforts to cause the Third Party to address such inability to the reasonable satisfaction of Genentech. If Scios Nova is unable to rectify the inability of Third Party manufacturer, the Parties will discuss and implement a coordinated strategy to cause the Third Party manufacturer to address such inability and Genentech will be entitled to participate in discussions with such Third Party manufacturer. 8.5 TRANSFER PRICE OF PRODUCTS. The Lead Party shall be entitled to charge the collaboration its Cost of Goods Sold, on a Product-by-Product basis, for Collaboration Products so supplied for sale in the Co-Promotion Territory. The transfer price for Scios Nova Products supplied to Genentech for sale in the Licensed Territory will be the Cost of Goods Sold plus [ ]. Scios Nova will invoice Genentech for shipments of such Scios Nova Products to 35. the Licensed Territory on a shipment by shipment basis. Genentech shall pay each invoice within thirty (30) days of receipt of the invoice. 8.6 MANUFACTURE OF COLLABORATION PRODUCTS FOR CLINICAL TRIALS. (a) Scios Nova will supply in accordance with a mutually agreeable supply schedule, reasonable quantities of Auriculin [ ] for clinical trials in the Co-Promotion Territory. (b) Scios Nova shall supply to Genentech, [] ], reasonable quantities of Collaboration Products that were initially Scios Nova Products (including Auriculin) for preclinical studies and clinical trials in the Licensed Territory. (c) The Lead Party will supply, in accordance with a mutually agreeable supply schedule, reasonable quantities of Collaboration Products (other than Auriculin) for which it is Lead Party for preclinical studies and clinical trials in the Co-Promotion Territory and shall charge the collaboration the cost thereof as a Development Cost with respect to those quantities used in the Co-Promotion Territory as described in Exhibit A. 8.7 SHORTAGE OF SUPPLY, INVENTORY. (a) In the event that the Lead Party is unable to manufacture sufficient quantities of Collaboration Products, the Parties shall negotiate in good faith an allocation between the Co-Promotion Territory and the Licensed Territory of the available Collaboration Product as well as that to be subsequently manufactured. If the Parties are unable to agree on such an allocation, then the Parties will allocate all available and future quantities of the Collaboration Product, after taking into account the inventories of the Collaboration Product in the countries in which the Parties are marketing, between the Co-Promotion Territory and the Licensed Territory based on [ ] or, if the Collaboration Product is not then being sold in both Territories, based on forecasted supply schedules for the following [ ] (reasonably determined by the JCC with respect to the Co-Promotion Territory and by Genentech with respect to the Licensed Territory). The JCC and the JFC will decide on an appropriate level of inventory for each Collaboration Product in the Co-Promotion Territory prior to the launch of such Product. (b) With respect to Natrecor, the Parties shall first negotiate in good faith an allocation of supply inside the Field and outside the Field. If the Parties are unable to agree on such an allocation, the Parties will first allocate all available and future quantities of Natrecor, after taking into account the inventories of Natrecor in the countries in which the Parties are marketing, inside the Field and outside the Field based on the average numbers of units invoiced [ ] or if Natrecor is not then being sold inside and outside the Field, based on forecasted supply schedules for the following [ ] (reasonably determined by the JCC with respect 36. to sales in the Field in the Co-Promotion Territory, Genentech with respect to sales in the Field in the Licensed Territory and Scios Nova with respect to worldwide sales outside the Field). Thereafter, the Parties shall allocate Natrecor between the Co-Promotion Territory and the Licensed Territory as provided in Section 8.7(a). 8.8 INABILITY TO SUPPLY. (a) If the Lead Party is unable for any reason to supply all of the reasonably forecasted supply schedule for Collaboration Products for clinical trials or commercial use as required as by this Agreement or is unable to produce the commercial supply at a gross profit margin acceptable to the JCC as falling within industry norms for this type of product and such inability results in, or is reasonably likely to have, an adverse material impact on the ability to conduct clinical trials of the Collaboration Product or to sell a Collaboration Product as permitted hereunder or to have an adverse material impact on the ability of the other Party to exercise its rights or fulfill its obligations hereunder, the other Party shall provide notice of such adverse material impact or the likelihood of such adverse material impact to the Lead Party. The Parties will promptly thereafter meet to discuss the causes and potential solutions to such inability to supply cost effectively the Collaboration Product. (b) The Lead Party shall have one hundred twenty (120) days after the receipt of such notice from the other Party to cure such inability. If the Lead Party does not cure or substantially cure such inability during the one hundred twenty (120) day period or does not demonstrate to the other Party's satisfaction that it will be able to substantially cure such inability within the sixty (60) days next following the above one hundred twenty (120) day period, then in addition to any other right or remedy the other Party may have available, then (i) with respect to the Co-Promotion Territory, the JCC shall recommend to the Parties a proposed solution to the inability to supply, which may include the use of Third Party suppliers, or the grant to the other Party of a non-exclusive right to manufacture the applicable Collaboration Product and (ii) with respect to the Licensed Territory, the other Party shall thereafter have, upon written notice to the Lead Party, the co-exclusive right and license to produce and supply Collaboration Product for clinical trials and commercial use in the Licensed Territory. (c) If the other Party receives the right to manufacture and supply a Collaboration Product hereunder, the Lead Party shall promptly provide to the other Party or its designee, all of the technology and materials in the Lead Party's possession and reasonably necessary to produce and supply the Collaboration Product. The exercise of the right granted in this Section 8.8 will not preclude the other Party from pursuing any right which it may have because of the Lead Party's inability to supply the requirements of a Collaboration Product for clinical trials and commercial sale. 8.9 TERMINATION OF PARTICIPATION. If a Party elects to terminate its participation in the development and commercialization of a Collaboration Product pursuant to Section 4.5, and if such Party has the obligation to manufacture and supply that Collaboration Product, it shall immediately provide to the other Party if the other Party so requests all process and manufacturing technology, material and data and, provide access to regulatory filings sufficient 37. to enable the other Party concurrently to produce and supply the non-terminating Party's requirements of such Collaboration Product. Until the earlier of (i) the date the other Party is able to manufacture and supply its own requirements of Collaboration Products or (ii) two years, the obligation of the terminating Party to manufacture and supply such Collaboration Product shall remain in effect but the manufacturing Party shall be paid by the other Party the Cost of Goods Sold for supply of such Product. The transferring Party shall provide reasonable assistance to the other Party with respect to such transfer so as to permit the other Party to begin manufacturing and supplying its requirements as soon as possible to minimize any disruption in the continuity of supply. In addition, the transferring Party shall provide a right of reference and access to the other Party to all of the transferring Party's appropriate regulatory filings for the manufacture of the Collaboration Product. This Section 8.9 shall not apply to the manufacture and supply of Natrecor. 8.10 TERM OF SUPPLY. Scios Nova's obligation to manufacture and supply Scios Nova Products in the Co-Promotion Territory and Genentech's obligation to manufacture and supply Genentech Products in the Co-Promotion Territory shall terminate on the earlier to occur of the exercise of the Purchase Option or Sales Option pursuant to Section 7.4 or the mutual agreement of the Parties to terminate their rights and obligations to Co-Promote. Scios Nova's obligation to manufacture and supply Scios Nova Products in the Licensed Territory shall terminate at such time as Genentech no longer is obligated to pay Scios Nova royalties in the Licensed Territory. At least twenty-four (24) months prior to such termination, the Party whose obligation to manufacture and supply a Collaboration Product is terminating shall provide to the other Party if the other Party so requests all process and manufacturing technology, materials and data and provide access to regulatory filings sufficient to enable the other Party to produce and supply the other Party's requirements of Collaboration Product and the other Party shall have a royalty-free, nonexclusive right, under the transferring Party's Patents and Know-how, to make and have made that Collaboration Product, subject to any royalty obligation to a Third Party. The transferring Party shall provide reasonable assistance to the other Party with respect to such transfer so as to permit the other Party to begin manufacturing and supplying its requirements as soon as possible to minimize any disruption in the continuing of supply. In addition, the party who is transferring the technology and materials shall provide a right of reference and access to the other Party to all of the transferring Party's appropriate regulatory filings for the manufacture of the Collaboration Product. Notwithstanding the foregoing, and except in the case of a transfer following exercise of the rights under Section 7.4, the providing party may continue to manufacture the Product for its own purposes. ARTICLE 9. LICENSES 9.1 PATENT LICENSES TO GENENTECH WITHIN THE FIELD. Scios Nova grants to Genentech a worldwide license under the Scios Nova Patents and in the Field (a) to develop, use, sell, offer for sale, have sold and import Collaboration Products that were originally Scios Nova Products and to make and have made such Collaboration Products to the extent provided under this Agreement and (b) to develop, make, have made, use, sell, offer for sale, have sold and import Collaboration Products that were originally Genentech Products. Such license shall be 38. co-exclusive with Scios Nova in the Co-Promotion Territory and exclusive even as to Scios Nova in the Licensed Territory (except as provided in Section 6.5 above). Genentech covenants and agrees not to use the Scios Nova Patents outside of the Field. 9.2 PATENT LICENSES TO SCIOS NOVA WITHIN THE FIELD. Genentech grants to Scios Nova a license under the Genentech Patents, in the Co-Promotion Territory and in the Field (a) to develop, make, have made, use, sell, offer for sale, have sold and import Collaboration Products that were originally Scios Nova Products and (b) to develop, use, sell, offer for sale, have sold and import Collaboration Products that were originally Genentech Products. Such license shall be co-exclusive with Genentech. Scios Nova covenants and agrees not to use the Genentech Patents outside of the Field. 9.3 NONEXCLUSIVE KNOW-HOW LICENSE TO GENENTECH. Scios Nova grants Genentech a paid-up, non-exclusive, worldwide license to use Scios Nova Know-how in the Field solely for the purposes of developing, manufacturing, having manufactured, using, selling, offering for sale and importing Collaboration Products. Genentech covenants and agrees not to develop, make, have made, use, sell, offer for sale, have sold or import any product using the Scios Nova Know-how outside of the Field. 9.4 NONEXCLUSIVE KNOW-HOW LICENSE TO SCIOS NOVA. Genentech grants Scios Nova a paid-up, non-exclusive, worldwide, license to use Genentech Know-how in the Field solely for the purposes of developing, manufacturing, having manufactured, using, selling, offering for sale and importing Collaboration Products in the Co-Promotion Territory. Scios Nova covenants and agrees not to develop, make, have made, use, sell, offer for sale, have sold or import any product using the Genentech Know-how outside of the Field. 9.5 SUBLICENSING. Each Party may grant sublicenses under Sections 9.1, 9.2, 9.3 or 9.4 only (i) with the prior approval of the Management Committee upon recommendation of the JCC with respect to the Co-Promotion Territory or (ii) with the prior written consent of Scios Nova with respect to the Licensed Territory. Unless otherwise agreed, each sublicensee in the Licensed Territory shall be subject to all of the obligations of Genentech hereunder applicable to that part of the Licensed Territory being licensed. Genentech shall provide Scios Nova with a copy of each proposed sublicense agreement, but Genentech may redact terms that are strictly financial. 9.6 THIRD PARTY TECHNOLOGY. The licenses granted under Sections 9.1 through 9.4 include sublicenses of Third Party technology to the extent that such sublicenses can be granted. The Parties shall account for and include all Sublicense Revenues in the calculation of Operating Profits or Losses, as provided in Exhibit A. Any sublicense of Third Party technology hereunder shall be subject to the terms and conditions of the license under which such sublicense is granted. Each Party agrees to use commercially reasonable and diligent efforts to maintain such licenses of Third Party technology. In addition, each Party agrees to provide the other Party, promptly after receipt, with any notice of default that it may receive from a Third Party licensor and to permit the other Party to cure such default in its stead. Scios Nova further agrees to provide Genentech with thirty (30) days written notice if it desires to terminate the Queen's Agreement 39. and to assign such Agreement to Genentech upon request from Genentech (including the obligation to pay royalties thereunder. Regardless of when the agreement with the Third Party was executed, any royalties payable to Third Parties in connection with the manufacture, use, sale, offer for sale and importation of Collaboration Products in the Co-Promotion Territory shall be chargeable to the collaboration (including royalties payable by Scios Nova to (i) Queen's University, pursuant to an Agreement dated July 5, 1993 among Scios Nova, Queen's University and Parteq Research and Development Innovations (the "Queen's Agreement"), (ii) Merck & Co., Inc. pursuant to a Settlement Agreement dated October 26, 1987, between Scios Nova and Merck (the "Merck Agreement", and (iii) Biotechnology Research Partnership, Ltd. ("BRP"), pursuant to an Agreement of the Sale of Joint Venture Interest dated September 30, 1988, between Scios Nova and BRP); PROVIDED, HOWEVER, that in calculating such Third Party Royalties, amounts payable to BRP shall be reduced by 63% so as to be net of Scios Nova's economic interest in BRP as of the Effective Date. Any royalties payable to Third Parties under a license entered into by Scios Nova prior to the Effective Date that become payable in connection with the manufacture, use, sale, offer for sale or importation of Collaboration Products in the Licensed Territory shall be borne by Scios Nova. Any royalties payable to Third Parties under a license entered into by Genentech either before or after the Effective Date that become payable in connection with the manufacture, use, sale, offer for sale or importation of Collaboration Products in the Licensed Territory shall be borne by Genentech; PROVIDED, HOWEVER, that Genentech shall be entitled to deduct [ ] of any such royalties required for Genentech to exercise its rights under the licenses granted by Sections 9.1 and 9.3 against royalties owing to Scios Nova under Section 7.6; in no event, however, shall the royalties payable under Section 7.6 be reduced by more than [ ]. No Party shall incur any royalty obligations to any Third Party that are specific to the Collaboration Products without the prior written consent of the other Party. ARTICLE 10. TRADEMARKS 10.1 PRODUCT TRADEMARKS. (a) In the Co-Promotion Territory, Auriculin shall be sold under the Auriculin trademark, which shall be licensed to Genentech on a co-exclusive basis for use in the Field in the Co-Promotion Territory, for the purposes of marketing and commercializing Auriculin. If Scios Nova is developing Natrecor outside of this collaboration for use outside of the Field, Natrecor shall be sold by Scios Nova in the Co-Promotion Territory under the Natrecor trademark and by Genentech in the Co-Promotion Territory under a separate trademark chosen and owned by Genentech; PROVIDED, HOWEVER, that if the FDA requires the use of a single trademark for all indications of Natrecor, the Natrecor trademark shall be licensed to Genentech on a co-exclusive basis for use in the Field in the Co- Promotion Territory. If the Parties are collaborating with respect to Natrecor inside and outside of the Field, Natrecor shall be sold by both Parties in the Co-Promotion Territory under the Natrecor trademark, which shall be licensed to Genentech on a co-exclusive basis in the Co-Promotion Territory. The Auriculin and Natrecor trademarks shall be owned by Scios Nova in the Co-Promotion Territory. All other Collaboration Products shall be sold in the Co-Promotion Territory under trademarks selected by the JCC and owned jointly 40. by the Parties in the Co-Promotion Territory. Each Party hereby grants the other a fully-paid co-exclusive license to use its trademarks in the Co- Promotion Territory for the Co-Promotion activities provided for in this Agreement. (b) Auriculin shall be sold in the Licensed Territory under the Auriculin trademark, if available and commercially practical, which shall be owned by Genentech. If the Auriculin trademark is not available or commercially practical in a country in the Licensed Territory or in all of the Major European Countries, then Auriculin may be sold in that country or in the Licensed Territory under a different trademark chosen and owned by Genentech. If Scios Nova is developing Natrecor outside of this collaboration for use outside of the Field, Natrecor shall be sold by Genentech in the Licensed Territory under a separate trademark chosen and owned by Genentech; PROVIDED, HOWEVER, that if the CPMP requires the use of a single trademark for all indications of Natrecor, Genentech shall have the right to file for and maintain, in its own name, the Natrecor trademark in the Licensed Territory. If the Parties are collaborating with respect to Natrecor inside and outside of the Field, Natrecor shall be sold by Genentech in the Licensed Territory under the Natrecor trademark, which trademark Genentech shall have the right to file for and maintain, in its own name. Genentech will select all other trademarks, and own all trademarks, for the sale and use of Collaboration Products in the Licensed Territory and will bear all expenses thereof. If Genentech's rights hereunder revert to non- exclusive for a particular Collaboration Product, Genentech shall grant, and hereby does grant, a non-exclusive, sublicensable license to Scios Nova to use the trademarks for such Collaboration Product for the sale of such Collaboration Product in the Licensed Territory and in the Field. 10.2 INFRINGEMENT OF TRADEMARKS. Each Party shall notify the JCC promptly upon learning of any actual, alleged or threatened infringement of a trademark applicable to a Collaboration Product (the "Trademark") in the Co-Promotion Territory or of any unfair trade practices, trade dress imitation, passing off of counterfeit goods, or like offenses in the Co-Promotion Territory. Upon learning of such offenses from a Party regarding a jointly owned Trademark, or a Trademark owned solely by a Party because the JCC determined that joint ownership is not feasible, the JCC shall confer with the Parties regarding which Party and counsel should be assigned to defend the Trademark. The Party defending the Trademark shall take all reasonable and appropriate steps to protect, defend and maintain the Trademark for use by the Parties in connection with the Collaboration Product. Upon learning of such an offense from a Party regarding a Trademark owned solely by one of the Parties, and not provided for above in this Section, the JCC shall confer with the Parties regarding the defense of such Trademark. The decision whether and how to defend such a Trademark owned solely by one Party will rest with such Party. 10.3 COSTS OF DEFENSE FOR JOINTLY OWNED TRADEMARK. All of the costs, expenses and legal fees in bringing, maintaining and prosecuting any action to maintain, protect or defend a jointly owned Trademark in the Co-Promotion Territory, or a Trademark owned solely by a Party because the JCC determined that joint ownership is not feasible in the Co-Promotion Territory, and any recovery shall be included in the Other Operating Income/Expense. 41. 10.4 COSTS OF DEFENSE FOR SOLELY OWNED TRADEMARKS. All of the costs, expenses and legal fees in bringing, maintaining and prosecuting any action to maintain, protect or defend a Trademark owned solely by one Party and not provided for in Section 10.3 shall be borne solely by such Party and any recovery shall be solely for such Party's account. If a Party fails to bring an action with respect to the Co-Promotion Territory within a period of sixty (60) days of notice to the other Party requesting action, the other Party will have the right to bring and control any such action by counsel of its own choice and its own expense. If one Party brings any such action, the other Party agrees to be joined as a party plaintiff if necessary to prosecute the action and to give the first Party reasonable assistance and authority to file and prosecute the suit. Any damages or other monetary awards recovered pursuant to such action by the other Party shall be allocated first to the costs and expenses of the Party bringing suit, then to the costs and expenses, if any of the other Party. Any amounts remaining shall be allocated two-thirds to the Party bringing suit and one-third to the other Party. None of the costs, expenses and legal fees nor any damages or other monetary awards recovered shall be included in the determination of Operating Profits or Losses. ARTICLE 11. CONFIDENTIALITY 11.1 CONFIDENTIALITY; EXCEPTIONS. Except to the extent expressly authorized by this Agreement or otherwise agreed in writing, the Parties agree that, for the term of this Agreement and for seven (7) years thereafter, the receiving Party shall keep confidential and shall not publish or otherwise disclose or use for any purpose other than as provided for in this Agreement any Information and other information and materials furnished to it by the other Party pursuant to this Agreement (collectively, "Confidential Information"), except to the extent that it can be established by the receiving Party that such Confidential Information: (a) was already known to the receiving Party, other than under an obligation of confidentiality, at the time of disclosure by the other Party; (b) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving Party; (c) became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving Party in breach of this Agreement; (d) was disclosed to the receiving Party, other than under an obligation of confidentiality, by a Third Party who had no obligation to the disclosing Party not to disclose such information to others; or. (e) was subsequently developed by the receiving Party without use of the Confidential Information as demonstrated by competent written records. 42. 11.2 AUTHORIZED DISCLOSURE. Each Party may disclose Confidential Information hereunder to the extent such disclosure is reasonably necessary in filing or prosecuting patent applications, prosecuting or defending litigation, complying with applicable governmental regulations or conducting preclinical or clinical trials, provided that if a Party is required by law or regulation to make any such disclosure of the other Party's Confidential Information it will, except where impracticable for necessary disclosures, for example in the event of medical emergency, give reasonable advance notice to the other Party of such disclosure requirement and, except to the extent inappropriate in the case of patent applications, will use its reasonable efforts to secure confidential treatment of such Confidential Information required to be disclosed. In addition, each Party shall be entitled to disclose, under a binder of confidentiality containing provisions as protective as those of this Article 11, Confidential Information to consultants and other Third Parties only for any purpose provided for in this Agreement. Nothing in this Article 11 shall restrict any Party from using for any purpose any Information developed by it during the course of the collaboration hereunder. 11.3 SURVIVAL. This Article 11 shall survive the termination or expiration of this Agreement for a period of seven (7) years. 11.4 TERMINATION OF PRIOR AGREEMENT. This Agreement supersedes the Confidentiality Agreement between the Parties dated January 14, 1994. All Information exchanged between the Parties under that Agreement shall be deemed Confidential Information and shall be subject to the terms of this Article 11. 11.5 PUBLICATIONS. Prior to the launch of any Collaboration Product in the Co-Promotion Territory, the JDC will determine the overall strategy for publication in support of such Collaboration Products in the Co-Promotion Territory. Except as required by law, each Party agrees that it shall not publish or present the results of studies carried out as part of the collaboration without the opportunity for prior review by the other Party. Each Party shall provide to the other the opportunity to review any proposed abstracts, manuscripts or presentations (including information to be presented verbally) which relate to the Field at least thirty (30) days prior to their intended submission for publication and such submitting Party agrees, upon written request from the other Party, not to submit such abstract or manuscript for publication or to make such presentation until the other Party is given a reasonable period of time to seek patent protection for any material in such publication or presentation which it believes is patentable. ARTICLE 12. OWNERSHIP OF INTELLECTUAL PROPERTY AND PATENT RIGHTS 12.1 OWNERSHIP OF INTELLECTUAL PROPERTY. Scios Nova shall own all inventions made under this Agreement solely by it or its employees. Genentech shall own all inventions made under this Agreement solely by its employees. All inventions made under this Agreement jointly by employees of Scios Nova and Genentech will be owned jointly by Scios Nova and Genentech and each Party shall retain full ownership under any Patents resulting therefrom, with full ownership rights in any field and the right to sublicense without the consent of the other Party, 43. without accounting. The laws of the United States with respect to joint ownership of inventions shall apply in all jurisdictions giving force and effect to this Agreement. 12.2 DISCLOSURE OF PATENTABLE INVENTIONS. In addition to the disclosures required under Article 14, each Party shall provide to the other any invention disclosure submitted in the normal course and disclosing an invention useful in the Field and relating to a Product. Such invention disclosures shall be provided to the other Party within ten (10) days after the Party commences preparation of a patent application based on such disclosure. 12.3 PATENT FILINGS. Each Party, at its sole discretion and responsibility shall file, prosecute and maintain Patents to cover its own discoveries and inventions relating to any Product in the Field and use reasonable efforts to file initially all applications in the United States. The determination of the countries inside the Co-Promotion Territory in which to file shall be made by mutual agreement of the Parties. The determination of the countries in the Licensed Territory in which to file shall be made by Genentech, which shall have the right to direct and control all material actions relating to the prosecution or maintenance of patents in the Licensed Territory that are being presented by Scios Nova, including patent interferences, reexaminations, reissuances, oppositions and revocation proceedings. The JDC will determine which Party shall file, prosecute and maintain Patents to cover any joint discoveries and inventions relating to the Field and in which countries in the Co-Promotion Territory to make such filings. Genentech will file, prosecute and maintain Patents to cover any joint discoveries and inventions relating to the Field in such countries in the Licensed Territory as it may determine. The Party which is responsible for filing such a joint Patent will be termed the "filing Party." The filing Party shall keep the other Party apprised of the status of each Patent and shall seek the advice of the other Party with respect to Patent strategy and draft applications and shall give reasonable consideration to any suggestions or recommendations of the other party concerning the preparation, filing, prosecution, maintenance and defense thereof. The Parties shall cooperate reasonably in the prosecution of all Patents covering joint inventions and covering Collaboration Products and shall share all material information relating thereto promptly after receipt of such information. If the Parties are unable to agree as to who is the filing Party or as to any aspect of patent prosecution of a Patent covering a joint invention or a Collaboration Product, each Party shall be free to take whatever action it deems appropriate to protect the joint invention or Collaboration Product, including the filing of patent applications subject to prior notification of the other Party. If, during the term of this Agreement, the filing Party intends to allow any Patent covering a Collaboration Product to lapse or become abandoned without having first filed a substitute, the filing Party shall, whenever practicable, notify the other Party of such intention at least sixty (60) days prior to the date upon which such Patent shall lapse or become abandoned, and the other Party shall thereupon have the right, but not the obligation, to assume responsibility for the prosecution, maintenance and defense thereof. No Party makes any warranty with respect to the validity, perfection or dominance of any Patent or other proprietary right or with respect to the absence of rights in Third Parties which may be infringed by the manufacture or sale of any Product. Each Party agrees to bring to the attention of the other Party any patent or patent application it discovers, or has discovered, and which relates to the subject matter of this Agreement. 44. 12.4 INITIAL FILINGS IF MADE OUTSIDE OF THE UNITED STATES. The Parties agree to use reasonable efforts to ensure that any Patent filed outside of the United States prior to a U.S. filing will be in a form sufficient to establish the date of original filing as a priority date for the purposes of a subsequent U.S. filing. 12.5 PATENT COSTS. (a) Patent Costs arising in the Co-Promotion Territory after the Effective Date shall be chargeable to the collaboration as Other Operating Income/Expense. (b) Patent Costs arising in the Licensed Territory after the Effective Date shall be borne by Genentech, unless incurred without Genentech's prior approval; PROVIDED, HOWEVER, that Genentech shall be entitled to a credit against royalties otherwise payable under Section 7.5 equal to the aggregate amount of the Patent Costs arising in the Licensed Territory that it pays and relating to the filing and maintenance of Scios Nova Patents but excluding the costs of patent interference, reexamination, reissue, opposition and revocation proceedings. In no event, however, shall such offset reduce the royalties otherwise payable under Section 7.5 by more than fifty percent (50%) in any period. If any such Patent Costs are initially paid by Scios Nova, Genentech shall promptly reimburse Scios Nova for such Patent Costs upon delivery of invoices. [] ] 12.6 ENFORCEMENT RIGHTS. (a) NOTIFICATION OF INFRINGEMENT. If either Party learns of any infringement or threatened infringement by a Third Party of the Scios Patents or Genentech Patents, such Party shall promptly notify the other Party and shall provide such other Party with available evidence of such infringement. (b) ENFORCEMENT IN THE CO-PROMOTION TERRITORY. The JCC and the Management Committee will determine the appropriate course of action to pursue with respect to infringement of any Scios Nova Patents or Genentech Patents specifically covering Collaboration Products being developed or marketed in the Field and in the Co-Promotion Territory. Costs of patent enforcement and related recoveries with respect to infringement in the Field and in the Co- Promotion Territory shall be charged to the collaboration as Other Operating Income/Expense. If the JCC and Management Committee are unable to decide on a joint action with respect to any infringement, each Party may proceed in such manner as the law permits and each Party shall bear its own expenses, with any recovery allocated pro rata to the extent of the Parties' costs and any excess allocated three-quarters (3/4) to the Party bringing suit and one-quarter (1/4) to the other Party. 45. (c) ENFORCEMENT IN THE LICENSED TERRITORY. Genentech shall have the right, but not the obligation, to institute, prosecute and control at its own expense any action or proceeding with respect to infringement of any of the Scios Nova Patents or Genentech Patents in the Field and in the Licensed Territory, by counsel of its own choice. Scios Nova shall have the right, at its own expense to be represented in any action by counsel of its own choice. If Genentech fails to bring an action or proceeding within a period of sixty (60) days of notice by Scios Nova to Genentech requesting action, Scios Nova will have the right to bring and control any such action or proceeding relating to a Scios Nova Patent by counsel of its own choice and Genentech will have the right to be represented in any such action by counsel of its own choice and at its own expense. If one Party brings any such action or proceeding, the other Party agrees to be joined as a party plaintiff if necessary to prosecute the action or proceeding and to give the first Party reasonable assistance and authority to file and prosecute the suit. Any damages or other monetary awards recovered pursuant to this Section 12.6(c) shall be allocated first to the costs and expenses of the Party bringing suit, then to the costs and expenses, if any, of the other Party. Any amounts remaining shall be allocated three-quarters (3/4) to the Party bringing suit and one-quarter (1/4) to the other Party. (d) ENFORCEMENT WITH RESPECT TO INDEPENDENT PRODUCTS. The Party marketing an Independent Product shall have the right, but not the obligation, to institute, prosecute and control any action or proceeding with respect to infringement of any of the Scios Nova Patents or Genentech Patents in the Field and covering the manufacture, use, sale, offer for sale and importation of an Independent Product being marketed by such marketing Party, by counsel of its own choice and at its own expense. The other Party shall have the right, at its own expense to be represented in any such action by counsel of its own choice. If the Lead Party fails to bring an action or proceeding within a period of sixty (60) days of notice from the other Party requesting action, the other Party will have the right to bring and control any such action or proceeding relating to that Party's Patents (but not the Patents of the Party marketing such Independent Product) by counsel of its own choice and the Party marketing the Independent Product will have the right to be represented in any such action by counsel of its own choice and at its own expense. If one Party brings any such action or proceeding, the other Party agrees to be joined as a party plaintiff if necessary to prosecute the action or proceeding and to give the first Party reasonable assistance and authority to file and prosecute the suit. The Party bringing such action shall be entitled to retain any damages or other monetary awards recovered pursuant to this Section 12.6(d). (e) SETTLEMENT WITH A THIRD PARTY. The Party that controls the prosecution of a given claim with respect to a Product shall also have the right to control settlement of such claim; PROVIDED, HOWEVER, that if one Party controls, no settlement shall be entered into without the written consent of the other Party if such settlement would materially and adversely affect the interests of such other Party. If there is no agreement between the Parties, then the dispute will be resolved pursuant to Section 17.1. If the dispute is not resolved pursuant to Section 17.1, then the case may not be settled. 12.7 INFRINGEMENT DEFENSE. 46. (a) DEFENSE IN THE CO-PROMOTION TERRITORY. If a Third Party asserts that a patent or other right owned by it is infringed by any Collaboration Product in the Co-Promotion Territory, the Management Committee shall establish a plan for a common defense and select the Party responsible for managing such Plan. The costs of any such action incurred by one or both of the Parties at the direction of the Management Committee (including the costs of any judgment, award, decree or settlement) will be chargeable to the collaboration. (b) DEFENSE IN THE LICENSED TERRITORY. If a Third Party asserts that a patent or other right owned by it is infringed by any Collaboration Product in the Licensed Territory, Genentech will be solely responsible for defending against any such assertions at its cost and expense, but no settlement may be entered into without the written consent of Scios Nova if such settlement would materially and adversely affect Scios Nova interests. If Genentech is required to pay royalties to such Third Party as a result of such action, it will be entitled to deduct [ ] of such royalties against royalties owing to Scios Nova under Section 7.5; PROVIDED, HOWEVER, that in no event shall the royalties payable under Section 7.5 be reduced by more than [ ]. DEFENSE WITH RESPECT TO INDEPENDENT PRODUCTS. If a Third Party asserts that a patent or other right owned by it is infringed by any Independent Product, the Party marketing such Independent Product will be solely responsible for defending against any such assertions at its cost and expense, but no settlement may be entered into without the written consent of the other Party if such settlement would materially and adversely affect its interests. ARTICLE 13. REPRESENTATIONS AND WARRANTIES 13.1 REPRESENTATIONS AND WARRANTIES. Each of the Parties hereby represents and warrants as follows: (a) This Agreement is a legal and valid obligation binding upon such Party and enforceable in accordance with its terms and such Party has the right to grant the licenses granted herein. The execution, delivery and performance of the Agreement by such Party does not conflict with any agreement, instrument or understanding, oral or written, to which it is a Party or by which it is bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having jurisdiction over it. (b) Such Party has not, and during the term of the Agreement will not, grant any right to any Third Party relating to its respective Patents and Know-how in the Field which would conflict with the rights granted to the other Party hereunder. (c) In addition, Scios Nova represents and warrants that it has given Genentech access to all clinical records which describe all adverse event reports related to Auriculin that have been filed with the FDA prior to the Effective Date. 47. (d) To the best of its knowledge, as of the Effective Date Scios Nova is not in default of any material provision of the Merck Agreement, Queen's University Agreement or Bachem Agreement. Except as set forth in Section 9.6, neither Party is obligated under any agreement as of the Effective Date to pay any Third Party royalties with respect to the Collaboration Products. 13.2 PERFORMANCE BY AFFILIATES. The Parties recognize that each may perform some or all of its obligations under this Agreement through Affiliates, PROVIDED, HOWEVER, that each Party shall remain responsible and be guarantor of the performance by its Affiliates and shall cause its Affiliates to comply with the provisions of this Agreement in connection with such performance. Each Party represents and warrants that this Agreement is a legal and valid obligation and is enforceable in accordance with its terms. ARTICLE 14. INFORMATION AND REPORTS 14.1 INFORMATION. Genentech and Scios Nova will disclose and make available to each other all preclinical, clinical, regulatory, commercial and other information, including without limitation all information relevant to the joint promotion of Collaboration Products, known by Genentech or Scios Nova concerning Collaboration Products at any time during the term of this Agreement. Each Party will use commercially reasonable and diligent efforts to disclose to the other Party all significant information promptly after it is learned or its significance is appreciated. Each Party shall own and maintain its own database of clinical trial data accumulated from all clinical trials of Collaboration Products for which it was responsible and of adverse drug event information for all Collaboration Products. At the option of the requesting Party, such data shall be provided in a computer readable format by the providing Party, to the extent available, which shall also assist in the transfer and validation of such data to the receiving Party. 14.2 COMPLAINTS. Each Party shall maintain a record of all complaints it receives with respect to any Collaboration Product. Each Party shall notify the other of any complaint received by it in sufficient detail and within five (5) business days after the event, and in any event in sufficient time to allow the responsible Party to comply with any and all regulatory requirements imposed upon it in any country. 14.3 ADVERSE DRUG EVENTS. The Parties recognize that the holder of a Drug Approval Application may be required to submit information and file reports to various governmental agencies on compounds under clinical investigation, compounds proposed for marketing, or marketed drugs. Information must be submitted at the time of initial filing for investigational use in humans and at the time of a request for market approval of a new drug. In addition, supplemental information must be provided on compounds at periodic intervals and adverse drug experiences must be reported at more frequent intervals depending on the severity of the experience. Consequently, each Party agrees to: 48. (a) provide to the other for initial and/or periodic submission to government agencies significant information on the drug from preclinical laboratory, animal toxicology and pharmacology studies, as well as adverse drug experience reports from clinical trials and commercial experiences with the compound; (b) in connection with investigational drugs, report to the other within three (3) days of the initial receipt of a report of any unexpected or serious experience with the drug, or sooner if required for either Party to comply with regulatory requirements; and (c) in connection with marketed drugs, report to the other within five (5) business days of the initial receipt of a report of any adverse experience with the drug that is serious and unexpected or sooner if required for either Party to comply with regulatory requirements. Serious adverse experiences mean any experience that suggests a significant hazard, contraindication, side effect or precaution, or any experience that is fatal or life threatening, is permanently disabling, requires or prolongs inpatient hospitalization, or is a congenital anomaly, cancer, or overdose. An unexpected adverse experience is one not identified in nature, specificity, severity or frequency in the current investigator brochure or the U.S. labeling for the drug. Each Party also agrees that if it contracts with a Third Party for research to be performed by such Third Party on the drug, that Party agrees to require such Third Party to report to contracting Party the information set forth in subparagraph (i), (ii), and (iii) above. 14.4 RECORDS OF NET SALES AND COSTS. Each Party will maintain complete and accurate records which are relevant to costs, expenses, sales and payments under this Agreement and such records shall be open during reasonable business hours for a period of five (5) years from creation of individual records for examination at the other Party's expense and not more often than once each year by an independent public accountant selected by the other Party for the sole purpose of verifying for the inspecting Party the correctness of calculations or such costs, expenses or payments made under this Agreement. In the absence of material discrepancies (in excess of 5% of Operating Profit or Loss, or royalties, as the case may be) resulting from such audit, the audit expense shall be paid by the Party requesting the audit. If material discrepancies do result, the audited Party shall bear the audit expense. Any records or accounting information received from the other Party shall be Confidential Information for purposes of Article 11. Results of any such audit shall be provided to both Parties, subject to Article 11. 14.5 CONTRIBUTION OF INFORMATION. It is the intention of the Parties that each will bring to the collaboration such information in its possession that is useful to the development and commercialization of Collaboration Products. 14.6 PUBLICITY REVIEW. The Parties agree that the public announcement of the execution of this Agreement shall be substantially in the form of the press release attached as Exhibit E and thereafter each Party shall be entitled to make or publish any public statement consistent with the contents thereof. Thereafter, Scios Nova and Genentech will jointly discuss and agree, based on the principles of this Section 14.6, on any statement to the public regarding this Agreement or any aspect of this Agreement subject in each case to disclosure otherwise required by law or regulation as determined in good faith by each Party. The principles to be 49. observed by Scios Nova and Genentech in such public disclosures will be: accuracy, the requirements for confidentiality under Article 10, the advantage a competitor of Scios Nova or Genentech may gain from any public statements under this Section 14.6, and the standards and customs in the biotechnology and pharmaceutical industries for such disclosures by companies comparable to Scios Nova and Genentech. The terms of this Agreement may also be disclosed to (i) government agencies where required by law, or (ii) Third Parties with the prior written consent of the other Party, which consent shall not be unreasonably withheld, so long as such disclosure is made under a binder of confidentiality and so long as highly sensitive terms and conditions such as financial terms are extracted from the Agreement or not disclosed upon the request of the other Party. ARTICLE 15. TERM AND TERMINATION 15.1 TERM. This Agreement shall commence as of the Effective Date. The Parties have specifically provided elsewhere in this Agreement the term during which certain rights and obligations hereunder shall apply. Unless sooner terminated as provided herein and except as provided in Section 15.4 below, (a) the remaining provisions of this Agreement relating to activities in the Co- Promotion Territory shall continue in effect until the date on which the Parties are no longer entitled to receive a share of Operating Profits or Losses on any Product and (b) the remaining provisions of this Agreement relating to activities in the Licensed Territory shall continue in effect until the date on which Genentech is no longer paying a royalty on Royalty-Bearing Sales in the Licensed Territory. Those provisions shall govern the term of the rights and obligations specifically covered thereby. 15.2 TERMINATION BY GENENTECH. (a) Genentech shall have the right to terminate this Agreement for any reason, beginning on the date of availability of the data from Scios Nova's Phase III trial in progress as of the Effective Date and ending thirty (30) days thereafter. Such termination shall be effective immediately upon written notice to Scios Nova. (b) Genentech shall have the right to terminate this Agreement as provided in Section 2.2 above. Such termination shall be effective immediately upon written notice to Scios Nova. In addition, this Agreement will terminate automatically as provided in Section 2.2. (c) Upon any termination under this Section 15.2, the Parties shall have no further rights or obligations under this Agreement except as set forth in Sections 15.4 and 15.5. 15.3 TERMINATION FOR BREACH. If either Party materially breaches this Agreement at any time, which breach is not cured within sixty (60) days of written notice thereof from the non-breaching Party (or if such breach is not susceptible of cure within such period, the breaching Party is not making diligent good faith efforts to cure such breach), the non-breaching Party shall have the right to terminate this Agreement. Upon such termination, the Parties shall have no further rights or obligations under this Agreement except as set forth in Section 15.5. The Parties 50. acknowledge and agree that failure to exercise any right or option with respect to any Product or to take any action expressly within the discretion of a Party shall not be deemed to be material breach hereunder. 15.4 SURVIVING RIGHTS. Except as modified above in Sections 15.2 and 15.3, the obligations and rights of the Parties under Articles 1, 11, 12, 16, 17 and 18 and Section 14.4 of this Agreement will survive termination or expiration (in the case of Article 11 and Section 14.4 for the periods set forth therein). 15.5 ACCRUED RIGHTS, SURVIVING OBLIGATIONS. Termination, relinquishment or expiration of the Agreement for any reason shall be without prejudice to any rights which shall have accrued to the benefit of either party prior to such termination, relinquishment or expiration, including damages arising from any breach hereunder. Such termination, relinquishment or expiration shall not relieve either Party from obligations which are expressly indicated to survive termination or expiration of the Agreement nor of any right or obligation under the Purchase Agreement. ARTICLE 16. INDEMNIFICATION 16.1 INDEMNIFICATION FOR INDEPENDENT PRODUCTS AND COLLABORATION PRODUCTS IN THE LICENSED TERRITORY. (a) Genentech hereby agrees to save, defend and hold Scios Nova and its agents and employees harmless from and against any and all suits, claims, actions, demands, liabilities, expenses and/or loss, including reasonable legal expense and attorneys' fees ("Losses") resulting directly from the manufacture, use, handling, storage, sale or other disposition of chemical agents or Collaboration Products sold or used in the Licensed Territory or Independent Products sold or used in any country in the world by Genentech, its Affiliates, agents or sublicensees except to the extent such Losses result from the negligence of Scios Nova. (b) In the event that Scios Nova is seeking indemnification under Section 16.1(a), it shall inform Genentech of a claim as soon as reasonably practicable after it receives notice of the claim, shall permit Genentech to assume direction and control of the defense of the claim (including the right to settle the claim solely for monetary consideration), and shall cooperate as requested (at the expense of Genentech) in the defense of the claim. (c) Scios Nova hereby agrees to save, defend and hold Genentech and its agents and employees harmless from and against any and all suits, claims, actions, demands, liabilities, expenses and/or loss, including reasonable legal expense and attorneys' fees ("Losses") resulting directly from the manufacture, use, handling, storage, sale or other disposition of chemical agents or such Independent Products sold or used in any country in the world by Scios Nova, its Affiliates, agents or sublicensees except to the extent such Losses result from the negligence of Genentech. 51. (d) In the event Genentech is seeking indemnification under Section 16.1(c), it shall inform Scios Nova of a claim as soon as reasonably practicable after it receives notice of the claim, shall permit Scios Nova to assume direction and control of the defense of the claim (including the right to settle the claim solely for monetary consideration), and shall cooperate as requested (at the expense of Scios Nova) in the defense of the claim. 16.2 INDEMNIFICATION FOR COLLABORATION PRODUCTS IN THE CO-PROMOTION TERRITORY. With respect to Collaboration Products: (a) Each Party hereby agrees to save, defend and hold the other Party and its agents and employees harmless from and against any and all losses resulting directly or indirectly from the manufacture, use, handling, storage, sale or other disposition of chemical agents or Collaboration Products sold or used in the Co-Promotion Territory by the indemnifying Party, its Affiliates, agents or sublicensees, but only to the extent such losses result from the negligence or willful misconduct of the indemnifying Party or its employees and agents and do not also result from the negligence or willful misconduct of the Party seeking indemnification. Any other losses resulting directly or indirectly from the manufacture, use, handling, storage, sale or other disposition of chemical agents or Collaboration Products in the Co-Promotion Territory shall be charged to the collaboration as an Other Operating Income/Expense at the time such claim is finally determined, whether by judgment, award, decree or settlement. (b) In the event that either Party receives notice of a claim with respect to a Collaboration Product in the Co-Promotion Territory, such Party shall inform the other Party as soon as reasonably practicable. The Parties shall confer how to respond to the claim and how to handle the claim in an efficient manner. ARTICLE 17. DISPUTE RESOLUTION 17.1 DISPUTES. The Parties recognize that disputes as to certain matters may from time to time arise during the term of this Agreement which relate to either Party's rights and/or obligations hereunder. It is the objective of the Parties to establish procedures to facilitate the resolution of disputes arising under this Agreement in an expedient manner by mutual cooperation and without resort to litigation. To accomplish this objective, the Parties agree to follow the procedures set forth in this Article 17 if and when a dispute arises under this Agreement. Unless otherwise specifically recited in this Agreement, disputes among members of each Operating Committee will be resolved as recited in this Article 17. Any disputes among members of Operating Committees formed hereunder relating to the collaboration shall be first referred to the Management Committee by either Party at any time after such dispute has arising and such Party believes that there has been sufficient discussion of the matter at the Operating Committee level. If the Management Committee is unable to resolve such a dispute within thirty (30) days of being requested by a Party to resolve an Operating Committee dispute, any Party may, by written notice to the other, have such dispute referred to their respective chief executive 52. officers, for attempted resolution by good faith negotiations within fourteen (14) days after such notice is received. In the event the designated executive officers are not able to resolve such dispute, either Party may at anytime after the 14 day period invoke the provisions of Section 17.2 hereinafter. 17.2 ARBITRATION. (a) Any dispute, controversy or claim arising out of or relating to the validity, construction, enforceability or performance of this Agreement, including disputes relating to alleged breach or to termination of this Agreement but excluding any determination as to the validity of the Parties' Patents which shall be subject to Section 17.4 below, shall be settled by binding arbitration as provided in this Section 17.2. (b) If a Party intends to begin an arbitration to resolve a dispute, such Party shall provide written notice to the other Party informing such other Party of such intention and the issues to be resolved. From the date of such request and until such time as any matter has been finally settled by arbitration, the running of the time periods contained in Section 15.4 as to which party must cure a breach of this Agreement shall be suspended as to the subject matter of the dispute. (c) The arbitration shall be conducted pursuant to the then current [ ] rules, except as provided in this Section 17.2. The arbitration shall be conducted by a panel of three arbitrators ("the Panel"). The Panel shall be selected from a pool of [] ] (d) If a Party can demonstrate to the Panel that the complexity of the issues or other reasons warrant the extension of one or more of the time tables in the [ ] rules, the Panel may extend such time tables, but in no event shall the time tables being extended so that the proceeding extends more than 1 year from its beginning to the award. (e) The Parties (i) acknowledge that the issues that may arise in any dispute involving this Agreement may involve a number of complex matters and (ii) confirm their intention that each Party will have the opportunity to conduct complete discovery with respect to all material issues involved in the dispute in accordance with the rules of the Federal Rules of Civil Procedure. (f) The Panel shall, in rendering its decision, apply the substantive law of the State of California, without regard to its conflict of laws provisions, except that the interpretation of and enforcement of this Section shall be governed by the Federal Arbitration Act. The Panel shall apply the Federal Rules of Evidence to the hearing. The proceeding shall take place in the Palo Alto, California. The fees of the Panels and [ ] shall be paid by the losing Party which shall be designated by the Panel. If the Panel is unable to designate a losing party, it shall so state and the fees shall be split equally between the Parties. 53. (g) The Panel is empowered to award any remedy allowed by law, including money damages, multiple damages, prejudgment interest and attorneys' fees, and to grant final, complete, interim, or interlocutory relief, including injunctive relief but excluding punitive damages. The Parties shall be deemed to have waived any right to such punitive damages. (h) Except as set forth in Section 17.2(g), above, each Party shall bear its own legal fees. The Panel shall assess its costs, fees and expenses against the Party losing the arbitration unless such Panel believes that neither Party is the clear loser, in which case the Panel shall divide its fees, costs and expenses according to its sole discretion. (i) The arbitration proceeding shall be confidential and the Panel shall issue appropriate protective orders to safeguard each Party's Confidential Information. Except as required by law, no Party shall make (or instruct the Panel to make) any public announcement with respect to the proceedings or decision of the Panel without prior written consent of each other Party. The existence of any dispute submitted to arbitration, and the award, shall be kept in confidence by the Parties and the Panel, except as required in connection with the enforcement of such award or as otherwise required by applicable law. 17.3 JURISDICTION. For the purposes of this Article 17, the Parties agree to accept the jurisdiction of the federal courts located in the Northern District of California for the purposes of enforcing awards entered pursuant to this Article and for enforcing the agreements reflected in this Article. 17.4 DETERMINATION OF PATENTS. Any dispute relating to the determination of validity of a Party's Patents shall be submitted exclusively to the federal courts located in Santa Clara County, California, and the Parties hereby consent to the jurisdiction and venue of such court. ARTICLE 18. MISCELLANEOUS 18.1 ASSIGNMENT. (a) Either Party may assign any of its rights under this Agreement in any country to any Affiliates and, with the prior written consent of the other Party, may delegate its obligations under this Agreement in any country to any Affiliates; PROVIDED, HOWEVER, that such assignment shall not relieve the assigning Party of its responsibilities for performance of its obligations under this Agreement. (b) Either Party may assign all of its rights and obligations under this Agreement in connection with a merger or similar reorganization or the sale of all or substantially all of its assets, or otherwise with the prior written consent of the other Party. This Agreement shall survive any such merger or reorganization of either Party with or into, or such sale of assets to, another party and no consent for such merger, reorganization or sale shall be required hereunder. 54. (c) This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the Parties. Any assignment not in accordance with this Agreement shall be void. 18.2 NON-SOLICITATION. The Parties recognize that each Party has a substantial interest in preserving and maintaining confidential its Confidential Information hereunder. Each Party recognizes that certain of the other Party's employees, including those engaged in development, marketing and sale of any Collaboration Product, may have access to such Confidential Information of the other Party. The Parties therefore agree not to solicit or otherwise induce or attempt to induce for purposes of employment, any employees from the other Party involved in the development, marketing or sales of any Collaboration Product during the period in which any Party is developing or commercializing a Collaboration Product in the Co-Promotion Territory hereunder and for a period of two years thereafter. 18.3 CONSENTS NOT UNREASONABLY WITHHELD. Whenever provision is made in this Agreement for either Party to secure the consent or approval of the other, that consent or approval shall not unreasonably be withheld, and whenever in this Agreement provision is made for one Party to object to or disapprove a matter, such objection or disapproval shall not unreasonably be exercised. 18.4 RETAINED RIGHTS. Nothing in this Agreement shall limit in any respect the right of either Party to conduct research and development with respect to and market products outside the Field using such Party's technology. 18.5 FORCE MAJEURE. Neither Party shall lose any rights hereunder or be liable to the other Party for damages or losses on account of failure of performance by the defaulting Party if the failure is occasioned by government action, war, fire, explosion, flood, strike, lockout, embargo, act of God, or any other cause beyond the control of the defaulting Party, provided that the Party claiming force majeure has exerted all reasonable efforts to avoid or remedy such force majeure; PROVIDED, HOWEVER, that in no event shall a Party be required to settle any labor dispute or disturbance. 18.6 FURTHER ACTIONS. Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement. 18.7 NO RIGHT TO USE NAMES. Except as otherwise provided herein, no right, express or implied, is granted by the Agreement to use in any manner the name "Scios Nova," "Genentech" or any other trade name or trademark of the other Party or its Affiliates in connection with the performance of the Agreement. 18.8 NOTICES. All notices hereunder shall be in writing and shall be deemed given if delivered personally or by facsimile transmission (receipt verified), telexed, mailed by registered or certified mail (return receipt requested), postage prepaid, or sent by express courier service, to the Parties at the following addresses (or at such other address for a party as shall be specified 55. by like notice; provided, that notices of a change of address shall be effective only upon receipt thereof). IF TO SCIOS NOVA, ADDRESSED TO: SCIOS NOVA INC. 2450 Bayshore Parkway Mountain View, CA 94043 Attention: General Counsel Telephone: (415) 966-1550 Telecopy: (415) 962-5816 IF TO GENENTECH, ADDRESSED TO: GENENTECH, INC. 460 Point San Bruno Boulevard South San Francisco, CA 94080 Attention: Corporate Secretary Telephone: (415) 225-1000 Telecopy: (415) 952-9881 18.9 WAIVER. Except as specifically provided for herein, the waiver from time to time by either of the Parties of any of their rights or their failure to exercise any remedy shall not operate or be construed as a continuing waiver of same or of any other of such Party's rights or remedies provided in this Agreement. 18.10 SEVERABILITY. If any term, covenant or condition of this Agreement or the application thereof to any Party or circumstance shall, to any extent, be held to be invalid or unenforceable, then (i) the remainder of this Agreement, or the application of such term, covenant or condition to Parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Agreement shall be valid and be enforced to the fullest extent permitted by law; and (ii) the Parties hereto covenant and agree to renegotiate any such term, covenant or application thereof in good faith in order to provide a reasonably acceptable alternative to the term, covenant or condition of this Agreement or the application thereof that is invalid or unenforceable, it being the intent of the Parties that the basic purposes of this Agreement are to be effectuated. 18.11 AMBIGUITIES. Ambiguities, if any, in this Agreement shall not be construed against any Party, irrespective of which Party may be deemed to have authorized the ambiguous provision. 18.12 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 56. 18.13 ENTIRE AGREEMENT. This Agreement, including all Exhibits attached hereto which are hereby incorporated herein by reference, sets forth all the covenants, promises, agreements, warranties, representations, conditions and understandings between the Parties hereto and supersedes and terminates all prior agreements and understandings between the Parties. There are no covenants, promises, agreements, warranties, representations, conditions or understandings, either oral or written, between the Parties other than as set forth herein and therein. No subsequent alteration, amendment, change or addition to this Agreement shall be binding upon the Parties hereto unless reduced to writing and signed by the respective authorized officers of the Parties. 57. IN WITNESS WHEREOF, the Parties have executed this Agreement in duplicate originals by their proper officers as of the date and year first above written. SCIOS NOVA INC. GENENTECH, INC. By:/S/RICHARD L. CASEY By: /S/G. KIRK RAAB ---------------------------- ------------------------------------ Title: CHAIRMAN Title:PRESIDENT and ----------------------------- CHIEF EXECUTIVE OFFICER -------------------------------- 58. EXHIBIT A FINANCIAL PLANNING, ACCOUNTING AND REPORTING FOR THE SCIOS NOVA/GENENTECH COLLABORATION AGREEMENT This Exhibit A to the Collaboration Agreement (the "Agreement") dated as of December 30, 1994, between Scios Nova Inc. ("Scios Nova") and Genetech, Inc. ("Genentech") addresses the financial planning, accounting policies and procedures to be followed in determining Operating Profits or Losses and related sharing of revenue and expenses in the Co-Promotion Territory. Terms not defined in this Exhibit shall have the meanings set forth in the Agreement. This Exhibit sets forth the principles for reporting accrual results and budgeted plans of the combined operations in the Co-Promotion Territory, the frequency of reporting, the use of a single functional currency for reporting, and the methods of determining payments to the parties and auditing of accounts. For purposes of this Exhibit only, the consolidated accounting of operations for the collaboration in the Co-Promotion Territory shall be referred to as ScioGen. ScioGen is not a legal entity and has been defined for identification purposes only. EXHIBIT B AURICULIN [REGISTERED TRADEMARK] "Auriculin" means any form or dosage for pharmaceutical use of a natriuretic peptide having the amino acid sequence: EXHIBIT C NATRECOR "Natrecor" means any form or dosage for pharmaceutical use of a natriuretic peptide having the amino acid sequence: EXHIBIT D SPILLOVER MEASUREMENT EX-10.33 4 EXHIBIT 10.33 EXHIBIT 10.33 PREFERRED STOCK PURCHASE AGREEMENT This Preferred Stock Purchase Agreement (the "Agreement") is entered into this 30th day of December, 1994 by and between SCIOS NOVA INC., a Delaware corporation (the "Company"), and GENENTECH, INC., a Delaware corporation (the "Purchaser"). RECITALS A. The parties desire that the Purchaser make an investment in the Company through the purchase of Preferred Stock. B. The Purchaser has also agreed to loan the Company $30 million pursuant to a Note Agreement of even date herewith (the "Note Agreement"). C. The parties also desire to enter into a collaboration agreement (the "Collaboration Agreement") relating to certain products for the treatment and prevention of acute renal failure. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and promises set forth in this Agreement, the parties agree as follows: 1. SALE AND PURCHASE. Subject to the terms and conditions hereof and in reliance upon the representations and warranties contained herein, the Company will issue and sell to the Purchaser at the Closing, and the Purchaser will purchase from the Company at the Closing 21,053 shares of Series A Preferred Stock of the Company at a purchase price of $950.00 per share, for an aggregate purchase price of $20,000,350. Such Preferred Stock shall have the rights, preferences, and privileges described in the Company's Certificate of Designation, a copy of which is attached as Exhibit A (the "Certificate of Designation"). The shares of Preferred Stock to be issued and sold to the Purchaser hereunder are hereinafter referred to as the "Shares." The total amount of common stock of the Company (the "Common Stock") and other securities issuable upon conversion of the Shares is hereinafter referred to as the "Conversion Stock." The Shares and the Conversion Stock are hereinafter collectively referred to as the "Securities." 2. CLOSING. The closing of the purchase and sale of the Shares hereunder (the "Closing") shall take place at the offices of Cooley Godward Castro Huddleson & Tatum, Five Palo Alto Square, Palo Alto, California 94306 on December 30, 1994 at 1:30 p.m. At the Closing, the Company shall deliver to the Purchaser a certificate representing the Shares registered in the name of the Purchaser, dated as of the Closing, against payment of the purchase price therefor by wire transfer or check in immediately available funds and made payable to the order of the Company. 1. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Purchaser as follows: (a) All corporate and other action or proceedings on the part of the Company for the authorization, execution, delivery and performance by the Company of this Agreement and the Note Agreement, and the consummation by the Company of the transactions contemplated hereby and thereby, has been duly and property taken, and this Agreement and the Note Agreement constitute valid and binding obligations of the Company, enforceable in accordance with their respective terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' fights. Upon issuance to the Purchaser for the consideration specified in Section 1 above, the Shares will be duly authorized, validly issued, fully paid and nonassessable and issued in accordance with applicable state and federal securities laws. The Company has reserved 2,105,300 shares of Common Stock for issuance upon conversion of the Shares. The Conversion Stock, when issued in accordance with the Certificate of Designation, and any shares of Common Stock issued in accordance with the terms of the Note Agreement (the "Note Shares"), will be duly authorized, validly issued, fully paid and nonassessable. (b) All consents, approvals, orders or authorizations of or registrations, qualifications, designations, declarations or filings with any federal, state or local governmental authority required on the part of the Company to be obtained in connection with the consummation of the transactions contemplated by this Agreement and the Note Agreement will have been obtained prior to, and be effective on and as of, the Closing. (c) The Company has delivered to the Purchaser true and complete copies of the Company's annual report on Form 10-K for the year ended December 31, 1993, the Company's quarterly reports on Form 10-Q for the quarters ended March 31, June 30, and September 30, 1994, and the Company's Proxy Statement dated May 10, 1994 (collectively, the "SEC Reports"). (d) All negotiations relative to this Agreement and the Note Agreement, and the transactions contemplated hereby and thereby, have been carried on by the Company directly with the Purchaser and, so far as is known to the Company, no person acting on behalf of the Company or any affiliate is or will be entitled to any brokers' or finders' fee or any other similar commission or reimbursement of expenses directly or indirectly from the Company. 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby represents and warrants to the Company as follows: (a) All corporate and other action or proceedings on the part of the Purchaser for the authorization, execution, delivery and performance by the Purchaser of this Agreement, the Note Agreement, and the consummation by the Purchaser of the transactions contemplated hereby and thereby, has been duly and properly taken, and this Agreement and the Note Agreement constitute valid and binding obligations of the Purchaser, enforceable in accordance 2. with their respective terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights. (b) All consents, approvals, orders or authorizations of or registrations, qualifications, designations, declarations or filings with any federal, state or local governmental authority required on the part of the Purchaser to be obtained in connection with the consummation of the transactions contemplated by this Agreement and the Note Agreement will have been obtained prior to, and be effective on and as of, the Closing except for the Purchaser's filing of Schedule 13D with the Securities and Exchange Commission, which shall be filed within ten days after the Closing. (c) The Purchaser has received and carefully reviewed the SEC Reports, together with the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1993, and has had the opportunity to obtain and receive such information as it deems necessary to understand the business and financial condition of the Company and to make the investment decision to purchase the Shares and enter into the Note Agreement. (d) All negotiations relative to this Agreement and the Note Agreement, and the transactions contemplated hereby and thereby, have been carried on by the Purchaser directly with the Company and so far as is known to the Purchaser, no person acting on behalf of the Purchaser or any affiliate is or will be entitled to any brokers' or finders' fees or any other similar commission or reimbursement of expenses directly or indirectly for the Purchaser. 5. COMPLIANCE WITH SECURITIES LAWS AND RESTRICTIONS ON TRANSFER OF SHARES. (a) The Purchaser hereby represents and warrants to the Company as follows: (i) The Purchaser is purchasing the Securities for its own account for investment only and not with a view to any resale or distribution thereof, except pursuant to an effective registration statement under the Act covering the sale, assignment or transfer or an opinion of counsel satisfactory to the Company that such registration is not required. (ii) As an investor in companies in the biopharmaceutical industry and a participant in such industry, the Purchaser has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment represented by the Securities, and it is able to bear the economic risk of such investment. (iii) The Purchaser understands that the Securities are being sold in a transaction which is exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), by reason of the provisions of Section 4(2) of the Act and the rules promulgated thereunder, and that such Securities will be subject to transfer restrictions and must be held indefinitely unless subsequently registered under the Act or an exemption from such registration is available. The certificates representing the Securities will be affixed with a legend reading as follows: 3. "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, ASSIGNED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT COVERING THE TRANSFER OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED." (iv) The restrictions on sale, assignment and transfer of the Securities contained in Section 5(a)(iii) shall terminate at such time as there shall be delivered to the Company and the Purchaser an opinion of counsel to the Purchaser, concurred in by counsel to the Company, to the effect that, due to the lapse of time or otherwise, no registration of the Securities is required under the Act in connection with any distribution of the Securities to the public in the United States. In addition, at any time after (A) the delivery of such opinion; (B) there exists an effective registration statement under the Act covering the Securities; or (C) the Purchaser shall have delivered to the Company a written undertaking, executed by the Purchaser and any broker proposing to execute sales, to the effect that such sales shall be made only in compliance with all applicable provisions of Rule 144 under the Act (or any applicable similar rule which may be promulgated from time to time), the Purchaser shall be entitled to exchange its certificate representing the Securities (or any portion thereof as to which (A), (B) or (C) above applies) for new certificates not bearing the legend set forth in Section 5(a)(iii), and the Company shall promptly remove or cause to be removed the notation restricting the transfer of such Securities and the stop transfer order referred to in Section 5(a)(v). (v) The Purchaser understands that notations restricting the transfer of the Securities will be made on the transfer records of the Company and that a stop transfer order will be entered with the Company's transfer agent. (b) None of the Securities nor any Note Shares shall be sold, assigned or transferred except in accordance with the provisions of this Section 5. (c) The Purchaser may sell, assign or transfer all or a portion of the Securities or the Note Shares to an affiliate of the Purchaser which agrees in writing with the Company to comply with all the provisions of this Agreement applicable to the Purchaser. For the purposes of this Agreement, the term "affiliate" of the Purchaser means any company or entity that, directly or indirectly through one or more intermediaries, is controlled by the Purchaser. (d) Except as provided in Section 5(c), the Purchaser will not transfer ownership of all or any portion of the Securities except as follows: the Purchaser shall notify the Company, in writing, of its good faith intention to promptly transfer ownership of such Securities, specifying the number of shares. For a period of five business days following receipt by the Company of such notification, the Company shall have the right to purchase or arrange for the purchase of all, but not less than all, of the Securities to which such notice relates. If the Company elects to purchase or arrange for the purchase of all such Securities, the Company shall so notify the Purchaser and the Company and the Purchaser shall conclude such purchase 4. and sale at the price described below within five business days of such notification. The purchase price per share for such Securities to be purchased by the Company, on an as-converted to Common Stock basis, shall be equal to the average closing price of the Company's Common Stock from and including the date of the Purchaser's written notice of its intention to transfer ownership through and including the date on which the Company provides written response of its intention to purchase such shares (but in any case no more than five business days). If the Company fails to notify the Purchaser of its intention to purchase such Securities or to arrange for the purchase of such Securities prior to expiration of five business days from receipt of Purchaser's notice, then, subject to Sections 5(a)(iii)-(v), the Purchaser shall thereafter have the right to transfer ownership of such Securities (the "Noticed Shares") to any person or persons without reoffering the Noticed Shares to the Company for purchase. If a transfer of ownership of any Noticed Shares occurs more than three months after the Company's election not to purchase such Noticed Shares, the Purchaser will advise the Company, for informational purposes only, of the transaction immediately prior to the sale or transfer. Notwithstanding the foregoing, with respect to the Securities (but not the Note Shares), the Purchaser shall not, without the Company's prior approval, sell to a single third party investor (including affiliates of such investor) greater than (i) 500,000 Securities in any twelve-month period prior to December 31, 1996 and (ii) 1,000,000 Securities in any twelve-month period thereafter (in each case calculated on an as-converted basis), except pursuant to a tender offer approved by the Company's board of directors. The foregoing volume limitation shall not be deemed to preclude the Purchaser from selling stock in excess of such 500,000 and 1,000,000 share limits to a broker or dealer who agrees to abide by such limits in connection with the resale of Securities to a single third party investor. In addition, the foregoing volume limitation shall terminate upon the issuance of any Note Shares. (e) The obligations of Section 5(d) shall terminate upon the earlier of (i) December 30, 2002, (ii) the date on which the Purchaser, together with its affiliates, no longer holds securities representing or convertible into at least 3% of the outstanding voting equity securities of the Company or (iii) the closing of a merger or similar transaction pursuant to which greater than 50% of the Company's voting stock is transferred to a stockholder or group of stockholders, or a sale of all or substantially all of the assets. 6. CONDITIONS TO CLOSING. (a) CONDITIONS TO PURCHASER'S OBLIGATIONS AT THE CLOSING. The Purchaser's obligation to purchase the Shares at the Closing is subject to the fulfillment on or prior to the Closing Date of the following conditions, any of which may be waived in whole or in part by the Purchaser: (i) The Company shall have filed the Certificate of Designation with the Delaware Secretary of State, as evidenced by a copy of the Certificate of Designation, file-stamped by the Delaware Secretary of State. 5. (ii) At the Closing, the purchase of the Shares by the Purchaser hereunder shall be legally permitted by all laws and regulations to which the Purchaser or the Company is subject. (iii) The Company shall have executed the Collaboration Agreement and the Note Agreement. (b) CONDITIONS TO COMPANY'S OBLIGATIONS AT THE CLOSING. The Company's obligation to sell and issue the Shares at the Closing is subject to the fulfillment on or prior to the Closing Date of the following conditions, any of which may be waived in whole or in part by the Company: (i) The Company shall have filed the Certificate of Designation with the Delaware Secretary of State. (ii) At the Closing, the purchase of the Shares by the Purchaser hereunder shall be legally permitted by all laws and regulations to which the Purchaser or the Company is subject. (iii) The Purchaser shall have executed the Collaboration Agreement and the Note Agreement. 7. ADDITIONAL STOCK PURCHASES BY PURCHASER. The Purchaser represents and warrants to the Company that prior to the Closing it holds 100,000 shares of Common Stock of the Company and that as of the Closing it is purchasing the Shares for investment and not with the intention of acquiring the Company or making the Company a subsidiary of the Purchaser. In light of such representations and in consideration of the Purchaser's opportunity to purchase Preferred Stock from the Company pursuant to the terms of this Agreement, the Purchaser agrees that prior to December 30, 1999, neither the Purchaser nor any affiliate of the Purchaser nor anyone acting on its or their behalf will acquire any equity securities of the Company without the Company's prior written approval, except as contemplated under the Note Agreement. The obligations of this Section 7 shall terminate upon the Company's receipt of a firm offer from a third party to acquire greater than 50% of the Company's voting stock or all or substantially all of the Company's assets. 8. REGISTRATION RIGHTS. (a) CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the following respective meanings: "COMMISSION" shall mean the Securities and Exchange Commission or any federal agency at the time administering the Act. 6. "ACT" shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "REGISTRABLE SECURITIES" shall mean (i) any Conversion Stock issued to the Purchaser upon conversion of the Shares, (ii) the Note Shares and (iii) any Common Stock of the Company issuable in respect of the Shares, the Conversion Stock or Note Shares as a result of any stock split, stock dividend, recapitalization. The terms "REGISTER", "REGISTERED" and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement on Form S-3 (or if no such registration is then available, then on Form S-1 or such other Form as is available) in compliance with the Act, and the declaration or ordering of the effectiveness of such registration statement. "REGISTRATION EXPENSES" shall mean all expenses incurred by the Company in complying with Section 8(b) hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company). "HOLDER" shall mean the Purchaser or an affiliate of the Purchaser which is a holder of the Shares or Conversion Stock issued pursuant to this Agreement or the Note Agreement. "AFFILIATE" shall mean any corporation or other entity or person that controls, is controlled by, or is under common control with the Holder. (b) REQUESTED REGISTRATION. In case the Company shall receive from a Holder a written request that the Company effect registration with respect to all or a part of the Registrable Securities, the Company will as soon as practicable, use its diligent best efforts to effect such registration (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, provided that the Company shall not be obligated to take any action to initiate any such registration, qualification or compliance pursuant to this Section 8(b) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Act. 7. Notwithstanding the foregoing, the Holder's right to request, and the Company's obligation to initiate, such a registration shall be limited as follows: (i) The Holder may request an initial registration covering up to forty percent (40%) of the Registrable Securities other than Note Shares at any time following the date of this Agreement; (ii) The Holder may request a second registration covering up to one-half of the Registrable Securities not then registered at any time on or after December 15, 1995; (iii) The Holder may request a third registration covering the remaining Registrable Securities not then registered at any time on or after March 15, 1996; and (iv) If the Company issues Note Shares to the Holder, the Holder may request an additional registration covering the Note Shares at any time after the issuance of the Note Shares. Subject to the foregoing clauses in this Section 8(b), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable, after receipt of the request or requests of the Holder. In the case of a registration statement on Form S-3, the Company shall use diligent efforts to (i) prepare and file such registration statement within 15 days of its receipt of the Holder's written request that the Company effect a registration and (ii) cause such registration statement to become effective as soon as practicable. In addition, the registration statement filed by the Company with the Commission shall cover the Shares if, but only if, such registration is required by the Commission in order to effect a registration of the Registrable Securities underlying such Shares. (c) EXPENSES OF REGISTRATION. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to this Agreement shall be borne by the Holder, except that in the case of a registration on Form S-3, the Registration Expenses borne by the Holder, exclusive of registration fees (including fees payable to the Commission and to the National Association of Securities Dealers or any securities exchange on which the Company's Common Stock is then traded) shall not exceed $20,000. (d) REGISTRATION PROCEDURES. In the case of each registration, qualification or compliance effected by the Company pursuant to this Agreement, the Company will keep Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. The Company will: (i) Use diligent efforts to keep such registration, qualification or compliance effective for such period of time, not to exceed eight years, as may be necessary to permit the Holder to complete the distribution described in the registration statement relating thereto; 8. (ii) Respond promptly to any comments of the Commission related to the registration statement and promptly prepare and file such amendments and supplements to the registration statement and related prospectus as may be necessary to comply with the provisions of the Act and to keep such registration statement effective for the period of time specified in Section 8(d)(i); (iii) Cause the Registrable Securities included in such registration to be registered on such securities exchange or over the counter market on which the Company's Common Stock is then traded; and (iv) Furnish such number of prospectuses and other documents incident thereto as the Holder from time to time may reasonably request. (e) TERMINATION OF REGISTRATION RIGHTS. The registration rights granted pursuant to this Agreement shall terminate at the time at which all of the Registrable Securities can be sold within a given three-month period without compliance with the registration requirements of the Act pursuant to Rule 144 or other applicable exemption supported by a written opinion of legal counsel for the Company which shall be reasonably satisfactory in form and substance to legal counsel for Holder; provided, however, that in no event shall the registration rights granted pursuant to this Agreement terminate while Note Shares may be issued pursuant to the terms of the Note Agreement. (f) INDEMNIFICATION. (i) The Company will indemnify a Holder, each of its officers and directors, and each person controlling such Holder, with respect to which registration, qualification or compliance has been effected pursuant to this Agreement and each underwriter, if any, and each person who controls any underwriter, against all expenses, claims, losses, damages and liabilities (or actions in respect thereof), arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of any rule or regulation promulgated under the Act applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each such Holder and each of its officers and directors, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expenses arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein. 9. (ii) A Holder will indemnify the Company, each of its directors and officers, each legal counsel and independent accountant of the Company, each underwriter, if any, of the Company securities covered by such a registration statement, and each person who controls the Company within the meaning of the Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such directors, officers, persons, or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, each case to the extent, but only to the extent, that such untrue statement (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company in an instrument duly executed by such Holder and stated to be specifically for use therein; provided, however, that the obligations of such Holder thereunder shall be limited to an amount equal to the value of the Registrable Securities at the time of their issuance. (iii) Each party entitled to indemnification under this Agreement (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement. No Indemnifying Party, in the defense of any such claim or litigation, except with the consent of each Indemnified Party, shall consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. (g) INFORMATION BY HOLDER. The Holder of Registrable Securities included in any registration shall furnish to the Company such information regarding such Holder and any distribution proposed by such Holder as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Agreement. (h) RULE 144 REPORTING. With a view to making available to the Holder the benefits of certain rules and regulations of the Commission which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use diligent efforts to (a) make and keep public information available, as those terms are understood and defined in the Commission's Rule 144, at all times, and (b) file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Exchange Act of 1934, as amended. 10. 9. RULE 144A. Upon the Purchaser's request, the Company will promptly provide such information and take such other actions as may reasonably be requested by the Purchaser in order to enable the Purchaser to effect a transfer of Securities and/or Note Shares pursuant to Rule 144A promulgated under the Act. 10. NOTICES. All notices and other communication required or appropriate to be given hereunder shall be in writing and shall be delivered by hand or mailed by certified mail, return receipt requested, or sent by telex or facsimile (in which case a confirming copy shall also be sent by certified mail or courier), to the following respective addresses or to such other addresses as may be specified in any notice delivered or mailed as above provided: (a) If to the Purchaser, to: Genentech, Inc. 460 Point San Bruno Boulevard South San Francisco, CA 94080 Telephone: (415) 225-1000 Facsimile: (415) 952-9881 Attention: Corporate Secretary (b) If to the Company, to: Scios Nova Inc. 2450 Bayshore Parkway Mountain View, CA 94043 Telephone: (415) 966-1550 Facsimile: (415) 962-5816 Attention: General Counsel Any notice or other communication delivered by hand or mailed shall be deemed to have been delivered on the date on which such notice or communication is delivered by hand, or in the case of certified mail deposited with the appropriate postal authorities on the date when such notice or communication is actually received, and in any other case shall be deemed to have been delivered on the date on which such notice or communication is actually received. 11. GOVERNING LAW. The parties have agreed that this Agreement will be governed by and construed in accordance with the laws of the State of California. 11. 12. AMENDMENTS, ASSIGNMENT. No provision of this Agreement may be waived, changed or modified, or the discharge thereof acknowledged orally, but only by an agreement in writing signed by the party against which the enforcement of any waiver, change, modification or discharge is sought. None of the rights or obligations of the parties hereto may be assigned or transferred without the written consent of the other parties hereto, except that the Purchaser may assign its rights and obligations to an affiliate which agrees, prior to the transfer, in writing with the Company to comply with all the provisions of this Agreement applicable to the Purchaser. 13. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. 14. ENTIRE AGREEMENT. This Agreement and the Note Agreement constitute the entire contract between the parties with respect to the subject matter hereof and thereof, and no party will be liable or bound to the other in any manner by any representations, warranties or covenants except as specifically set forth herein and therein. 15. TERM AND TERMINATION. This Agreement is effective as of the date first written above and, except as otherwise expressly provided herein, will continue in effect as to the Purchaser for so long as the Purchaser holds any shares of Common Stock of the Company unless earlier terminated by mutual written consent of both parties. 16. TITLES. The titles of the Sections of this Agreement are inserted for reference only, and are not to be considered as part of this Agreement in construing this Agreement. 12. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first above written. "THE COMPANY" SCIOS NOVA INC. By /s/ Richard L. Casey ------------------------------------ Richard L. Casey Chairman and Chief Executive Officer "THE PURCHASER" GENENTECH, INC. By /s/ G. Kirk Raab ----------------------------------- G. Kirk Raab President and Chief Executive Officer 13. EXHIBIT A CERTIFICATE OF DESIGNATION OF SERIES A PREFERRED STOCK OF SCIOS NOVA INC. (Pursuant to Section 151 of the Delaware General Corporation Law) SCIOS NOVA INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), hereby certifies that the following resolution was adopted on December 21, 1994 at a duly held meeting of the Board of Directors of the Corporation as required by Section 151 of the General Corporation Law: RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of the Corporation in accordance with the provisions of its Certificate of Incorporation, the Board of Directors hereby creates a series of Preferred Stock, par value $.001 per share, of the Corporation and hereby states the designation and number of shares, and fixes the relative powers, preferences, rights, qualifications, limitations and restrictions thereof (in addition to the provisions set forth in the Certificate of Incorporation of the Corporation, which are applicable to the Preferred Stock of all classes and series), as follows: Series A Preferred Stock: SECTION 1. DESIGNATION AND AMOUNT. Twenty One Thousand Fifty- Three (21,053) shares of Preferred Stock, $.001 par value, are designated "Series A Preferred Stock" with the powers, preferences, rights, qualifications, limitations and restrictions specified herein (the "Series A Preferred Stock"). Such number of shares may be increased or decreased by resolution of the Board of Directors; PROVIDED, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. 1. SECTION 2. DIVIDENDS. No dividends (other than those payable solely in the Common Stock of the Corporation) shall be paid on any Common Stock of the Corporation unless a dividend is paid with respect to all outstanding shares of Series A Preferred Stock in an amount for each such share of Series A Preferred Stock equal to or greater than the aggregate amount of such dividends payable upon all shares of Common Stock into which such share of Series A Preferred Stock could then be converted. SECTION 3. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, before any payment shall be made to the holders of shares of the Common Stock of the Corporation, the holders of shares of Series A Preferred Stock shall be entitled to receive $950.00 per share of Series A Preferred Stock then held by such holders, plus an amount equal to declared and unpaid dividends and distributions thereon. After payment of the full liquidation preference of the Series A Preferred Stock set forth in the preceding sentence, the assets of the Corporation legally available for distribution, if any, shall be distributed ratably to the holders of the Common Stock. Any consolidation or merger of the Corporation with or into any other corporation or other entity or person, or any other corporate reorganization, in which the shareholders of the Corporation immediately prior to such consolidation, merger or reorganization, own less than 50% immediately after such consolidation, merger or reorganization, or any transaction or series of related transactions in which in excess of fifty percent (50%) of the Corporation's voting power is transferred, shall be considered a liquidation under this Section 3. SECTION 4. VOTING RIGHTS. The holders of shares of Series A Preferred Stock shall not have any voting rights, except as required under the General Corporation Law of Delaware. SECTION 5. CONVERSION. (A) RIGHT TO CONVERT. Each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, into that number of shares of the Common Stock of the Corporation as determined by dividing $950.00 by the Conversion Price, determined as provided below, in effect on the date the certificate for such share is surrendered for conversion. The Conversion Price for the Series A Preferred Stock shall initially be $9.50 per share. The number of shares of Common Stock into which a share of Series A Preferred Stock is convertible is hereinafter referred to as the "Conversion Rate" of such series. (B) AUTOMATIC CONVERSION. Each share of Series A Preferred Stock shall automatically be converted into shares of Common Stock at its then effective Conversion Rate immediately upon the transfer of ownership by the initial holder to a third party which is not an Affiliate of such holder. For purposes hereunder, 2. "Affiliate shall mean a party that, directly or indirectly, through one or more intermediaries, controls or is controlled by such holder. (C) MECHANICS OF CONVERSION. Each holder of Series A Preferred Stock who desires to convert the same into shares of Common Stock pursuant to this Section 5 shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or any transfer agent for the Series A Preferred Stock, and shall give written notice to the Corporation at such office that such holder elects to convert the same; provided, however, that in the event of an automatic conversion pursuant to Section 5(B), the outstanding shares of Series A Preferred Stock shall be converted automatically without any further action by the holder of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent, and provided further that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless the certificates evidencing such shares of Series A Preferred Stock are delivered to the Corporation or its transfer agent as provided herein. Such notice shall state the number of shares of Series A Preferred Stock being converted. Thereupon, the Corporation shall promptly issue and deliver at such office to such holder a certificate or certificates for the number of shares of Common Stock to which such holder is entitled and shall promptly pay in cash or, to the extent sufficient funds are not then legally available therefor, in Common Stock (at the Common Stock's fair market value determined by the Board of Directors as of the date of such conversion), any declared and unpaid dividends on the shares of Series A Preferred Stock being converted. Such conversion shall be deemed to have been made at the close of business on the date of such surrender of the certificates representing the shares of Series A Preferred Stock to be converted, or in the case of automatic conversion on the date of transfer to the new holder, and the person entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock on such date. (D) ADJUSTMENT FOR SUBDIVISIONS AND COMBINATIONS. If the Corporation shall at any time or from time to time after the date that the first share of Series A Preferred Stock is issued (the "Original Issue Date") effect a subdivision of the outstanding Common Stock, the Conversion Price in effect immediately before that subdivision shall be proportionately decreased. Conversely, if the Corporation shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock into a smaller number of shares, the Series A Conversion Price in effect immediately before the combination shall be proportionately increased. Any adjustment under this Section 5(D) shall become effective at the close of business on the date the subdivision or combination becomes effective. 3. (E) ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. If the Corporation at any time or from time to time after the Original Issue Date makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, in each such event the Conversion Price that is then in effect shall be decreased as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Conversion Price then in effect by a fraction (1) the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (2) the denominator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price shall be adjusted pursuant to this Section 5(d) to reflect the actual payment of such dividend or distribution. (F) ADJUSTMENT FOR OTHER DIVIDENDS AND DISTRIBUTIONS. If the Corporation at any time or from time to time after the Original Issue Date makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, in each such event provision shall be made so that the holders of the Series A Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of other securities of the Corporation which they would have received had their Series A Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 5 with respect to the rights of the holders of the Series A Preferred or with respect to such other securities by their terms. (G) ADJUSTMENT FOR RECAPITALIZATIONS, ETC. If at any time or from time to time after the Original Issue Date, the Common Stock issuable upon the conversion of the Series A Preferred Stock is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 5 or in Section 3), in any such event each holder of Series A Preferred shall have the right thereafter to convert such stock into the kind and amount of stock and other securities and property receivable upon such 4. recapitalization, reclassification or other change by holders of the maximum number of shares of Common Stock into which such shares of Series A Preferred could have been converted immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof. SECTION 6. REACQUIRED SHARES. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Restated Certificate of Incorporation, or in any other Certificate of Designation creating a series of Preferred Stock or any similar stock or as otherwise required by law. SECTION 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the Corporation shall give each holder of shares of Series A Preferred Stock notice of such transaction and the details of such exchange at least fifteen days before the closing of such transaction, and each such holder shall have the right to convert such shares of Series A Preferred Stock into shares of Common Stock of the Corporation prior to such closing, or to receive in such transaction the amount of the liquidation preference set forth in Section 3, in the form of the other stock or securities, cash and/or other property as is received by the holders of the Common Stock. IN WITNESS WHEREOF, the undersigned have executed this certificate as of December 28, 1994. /s/ Richard L. Casey --------------------------------------- Richard L. Casey President and Chief Executive Officer /S/ JOHN H. NEWMAN --------------------------------------- John H. Newman Secretary 5. EX-10.34 5 EXHIBIT 10.34 EXHIBIT 10.34 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT COVERING THE TRANSFER OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. $30,000,000.00 Mountain View, California December 30, 1994 SCIOS NOVA INC. NOTE AGREEMENT WHEREAS, Scios Nova Inc., a Delaware corporation, (the "Company"), with its principal offices at 2450 Bayshore Parkway, Mountain View, California 94043, and GENENTECH, INC., a Delaware corporation (the "Lender"), desire to further their corporate collaboration arrangements as embodied in that certain Preferred Stock Purchase Agreement and that certain Collaboration Agreement (the "Collaboration Agreement"), each dated as of December 30, 1994; AND WHEREAS, the Company and the Lender agree that the Company shall have access to up to, but not in excess of, Thirty Million Dollars ($30,000,000) of credit from the Lender pursuant to the terms of this Note Agreement; AND WHEREAS, the Company has requested, and the Lender has agreed, that the Note Agreement be supported by a third party in the form of one or more Irrevocable Letters of Credit in the form attached hereto as Exhibit A issued by Swiss Bank Corporation ("SBC") on behalf of the Lender for the benefit of the Company (subject to Section 4(a) below), or such replacement credit support as may from time to time be established pursuant to Section 4(b) below (the "Facility"); AND WHEREAS, the Lender agrees that solely the Lender shall be obligated to repay SBC, or any successor bank extending credit under the Facility, for any draws made under the Facility by the Company; AND WHEREAS, the Company and Lender agree that the Company shall reimburse the Lender under the terms of the Note Agreement for draws made under the Facility. NOW THEREFORE, FOR VALUE RECEIVED, the Lender promises to loan to the Company up to, but not exceeding, Thirty Million Dollars ($30,000,000) and the Company promises to pay to the order of the Lender the amount drawn by or otherwise paid to the Company under the Facility (not to exceed $30,000,000), plus accrued interest as set forth below. 1. 1. PRINCIPAL. The amount drawn by the Company pursuant to the Facility shall not exceed Thirty Million Dollars ($30,000,000) in total. Any draw by the Company against the Facility shall irreversibly reduce the total amount made available under the Facility, even if the amount drawn is subsequently repaid by the Lender. Any principal amount owed by the Company to the Lender as a result of the Company's draws against the Facility shall be due and payable in full on December 30, 2002. 2. INTEREST. Interest on the unpaid balance of said principal amount from time to time outstanding shall accrue and compound annually at a rate of interest equal to the lesser of (a) the prime rate of interest as announced by Bank of America, N.T.& S.A. (San Francisco Branch) from time to time or, if such rate is not available, the prime rate of interest as printed in THE WALL STREET JOURNAL from time to time or (b) the maximum rate permissible by law (which shall be deemed to be the rate applicable to commercial transactions in the State of California) (calculated on the basis of a year of 365, or 366 as the case may be, days and actual days elapsed). Accrued interest, together with all outstanding principal, shall be due and payable on December 31, 2002. 3. PAYMENT. The principal amount of and interest accrued on this Note shall be payable, at the option of the Company, by any of the following means or any combination thereof: (a) in cash denominated in the currency of the United States of America; (b) by the issuance of Common Stock of the Company valued based on the average closing price of the Company's Common Stock (as reported by NASDAQ, or as traded on a securities exchange, as applicable) over the thirty-day period ending on the day preceding the payment; or (c) by set off against amounts representing profit sharing or royalty payments otherwise payable to the Company by Lender pursuant to Sections 7.2 and 7.5 of the Collaboration Agreement, which set off shall occur not later than December 30, 2002. Payments of principal and accrued interest shall be made at the address of the Lender, set forth in the Collaboration Agreement, or at such other place as the Lender shall have notified the Company in writing at least five days before such payment is due. All payments in respect of this Note shall be applied first to accrued and unpaid interest hereon, and thereafter to the unpaid principal amount hereof. This Note may be prepaid by the Company without penalty, in whole or in part by any of the means described above at any time. 4. FACILITY. (a) The Company shall reimburse the Lender for fees paid under Sections 2.03(a), 2.03(b) and 2.04 of the Reimbursement Agreement between the Lender and SBC to establish and maintain the initial Facility, plus up to $20,000 in reasonable legal fees and disbursements incurred by the Lender and SBC to establish such Facility. (b) Upon notice to the Lender at least forty-five days prior to (i) each anniversary date of this Note Agreement or (ii) expiration of the term of the initial Facility and each successor Facility, the Company may, at its discretion, select a successor Facility from one of the following alternatives, provided that it reimburses the Lender for out-of-pocket costs 2. associated with the establishment and maintenance of such Facility: (A) continuation of a letter of credit facility on terms substantially similar to the initial Facility with SBC or with another bank mutually agreeable to the Company and the Lender; (B) establishment of a line of credit facility with a bank and on terms mutually agreeable to the Company and the Lender; (C) if the Lender and the Company mutually agree, establishment of an escrow account pursuant to which the Lender would achieve a rate of return comparable to the rate of return on its investment portfolio; or (D) an agreement not to establish a separate facility as collateral under this Note Agreement but to make draws hereunder directly from the Lender. No facility established pursuant to this Section 4 shall extend beyond December 30, 2002. 5. LOST DOCUMENTS. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Note Agreement, and indemnity satisfactory to the Company (in the case of loss, theft or destruction) or surrender and cancellation of the Note Agreement (in the case of mutilation), the Company will make and deliver to the Lender a new Note Agreement of like tenor and unpaid principal amount and dated as of the date to which interest has been paid on the unpaid principal balance hereunder. 6. MISCELLANEOUS. (a) This Note Agreement is non-negotiable; provided, however, that it may be assigned to an affiliate of the Lender, in which case all covenants, agreements and undertakings in this Note Agreement shall bind and inure to the benefit of such assignee. (b) All notices, requests, consents and demands shall be made in writing and shall be mailed first class postage prepaid, to the Company or to the Lender at such respective addresses as may be furnished in writing to the other party hereto. (c) Except as otherwise provided herein, the Company hereby waives presentment for payment, demand, protest and notice of protest for nonpayment of this Note Agreement, and consents to any extension or postponement of the time of payment or any other indulgence. (d) If the Lender shall employ an attorney or take any other steps for collection of any part hereof after any default hereunder, the Company promises to pay all reasonable legal fees and other expenses reasonably incurred by the Lender in collecting or attempting to collect pursuant to this Note Agreement. (e) This Note Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California without regard to principles of conflicts of laws. (f) This Note Agreement may be executed in counterparts. 3. IN WITNESS WHEREOF, this Note Agreement has been executed and delivered on the date first above written by duly authorized representatives of the Company and the Lender. SCIOS NOVA INC. By /s/ Richard L. Casey --------------------------------------- Richard L. Casey Chairman and Chief Executive Officer GENENTECH, INC. By /s/ G. Kirk Raab --------------------------------------- G. Kirk Raab President and Chief Executive Officer EXHIBIT A TO NOTE AGREEMENT [Swiss Bank Corporation Letterhead] December 30, 1994 Scios Nova Inc. 2450 Bayshore Parkway Mountain View, CA 94043 Ladies and Gentlemen: We hereby establish, at the request and for the account of Genentech, Inc., a Delaware corporation (the "Corporation"), in your favor, as Beneficiary, our Irrevocable Letter of Credit No. V561116 in an amount equal to $30,000,000, effective immediately and expiring at the close of banking business at our San Francisco office hereinafter referred to on December 30, 1997 (the "STATED TERMINATION DATE"). We hereby irrevocably authorize you to draw on us, in an aggregate amount not to exceed the amount of this Letter of Credit set forth above and in accordance with the terms and conditions and subject to the reductions and reinstatements in amounts as hereinafter set forth, in one or more drawings by one or more of your Demands (as defined below), accompanied by a completed certificate in the form of Annex A attached hereto (a "Drawing"), or, if we have notified you that an event of default has occurred under the Reimbursement Agreement (as define below), a completed certificate in the form of Annex C hereto (a "Default Drawing"), in each case signed by you. Drawings and the Default Drawing must be in a minimum amount of $5,000,000 or a multiple thereof. Upon drawing by you, the amount of this Letter of Credit available to be drawn by you by any subsequent drawing shall be automatically decreased by an amount equal to the amount of such drawing. The drawing hereunder that reduces the amount available to be drawn hereunder to zero is herein sometimes referred to as the Final Drawing. Funds under this Letter of Credit will be made available to you against your demands made on us, which demands and any certificate accompanying such demands shall be made in writing or by telex or other telecommunications device capable of transmitting or creating a written a record, in the form of Annex B attached hereto (any such demand being referred to herein as a "DEMAND"). Demands and certificates shall be transmitted or delivered, as appropriate, to our office located at 101 California Street, San Francisco, California, Telex No. MCI 278 032 swbsf ur, Telecopy No. (415) 989-7570, Attention: Nancy Stoll and David Parrot, or at any other office in the United States which may be designated by us by written notice delivered to you. In the event you choose to transmit any Demand and certificate to us by telecopy, you shall give us telephonic notice of such transmission at the time thereof. Any drawing made under this Letter of Credit by transmission of your Demands and certificates by telecopy or telex should be immediately followed by overnight delivery to us of the originally executed Demands and certificate; provided that failure to deliver any such originally executed Demands and certificates by overnight delivery shall not affect any drawing which was made under this Letter of Credit by transmission of your Demands and certificates by telecopy of telex. Provided that in each case the Demand and accompanying certificates presented by you in connection with a drawing are in strict conformity with the terms and conditions of this Letter of Credit, the following time schedule shall prevail; (i) If a drawing is made by you hereunder at or prior to 10:00A.M., SAN FRANCISCO time, on a Business Day, payment shall be made to you or your order of the amount specified, in immediately available funds, at or prior to 4:00P.M., SAN FRANCISCO time, on such Business Day. (ii) If a drawing is made by you hereunder after 10:00A.M., SAN FRANCISCO time, on a Business Day, payment shall be made to you or your order of the amount specified, in immediately available funds, at or prior to 4:00P.M., SAN FRANCISCO time, on the next succeeding Business Day. Payment under this Letter of Credit shall be made by wire transfer of immediately available funds to the following account of the Beneficiary: Bankers Trust Company, New York, ABA No. 021-001-033, Re: 99-097-024 PAFS West, Acct. 101069. Upon the earliest of (i) our honoring your Final Drawing hereunder; (ii) the date on which this Letter of Credit shall have been surrendered by you for cancellation; (iii) the fifth Business Day following the sending of notice by us by telecopy (with telephonic confirmation) to you that an Event of Default has occurred under the Reimbursement Agreement (defined below); and (iv) the Stated termination Date, this Letter of Credit shall automatically terminate. This Letter of Credit sets forth in full our undertaking, and such reference to any document, instrument or agreement referred to herein (including, without limitation, the Reimbursement Agreement dated as of December 30, 1994 (the "REIMBURSEMENT AGREEMENT") between the Corporation and us), except only the Demands and the certificates attached hereto which are referred to herein; and any such reference shall not be deemed to incorporate herein by reference any document, instrument or agreement except for such Demands and such certificates. This Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 ( the "UNIFORM CUSTOMS"), PROVIDED that Article 41 thereof shall not be construed to limit the rights of the Beneficiary to make drawings in compliance with this Letter of Credit. This Letter of Credit shall be deemed to be a contract made under the laws of the State of California, and shall as to matters not governed by the Uniform Customs, be governed by and construed in accordance with laws of such State. As used herein, "BUSINESS DAY" a day which is not Saturday, Sunday or legal holiday on which banking institutions in the State of California or the State of New York are authorized or required to be closed. Except as otherwise provided herein, communications with respect to this Letter of Credit shall be in writing and shall be addressed to us at 101 California Street, San Francisco, California, Atten: Nancy Stoll and David Parrot specifically referring to the number of this Letter of Credit. Very truly yours, SWISS BANK CORPORATION San Francisco Branch /s/ Jamie Dillion /s/ Nang S. Peechaphand ------------------------------ ------------------------------- Jamie Dillion Nang S. Peechaphand Director Associate Director Merchant Banking Accounting ANNEX A ------- CERTIFICATE FOR A "DRAWING" SWISS BANK CORPORATION, SAN FRANCISCO BRANCH IRREVOCABLE LETTER OF CREDIT NO. V561116 The undersigned Beneficiary (the "Beneficiary"), hereby certifies to Swiss Bank Corporation, San Francisco (the "Bank"), with reference to Irrevocable Letter of Credit No. V561116 (the "Letter of Credit", the terms defined therein and not otherwise defined herein being used herein as therein defined) issued by the Bank in favor of the Beneficiary, that: (1) The Beneficiary is making a drawing under the Letter of Credit with respect to the Lending Facility, dated as of December 30, 1994 between the Beneficiary and the Corporation. (2) The amount of the Demand accompanying the certificate, which Demand has been executed by one of the President, the Vice President-Finance and the General Counsel of the Beneficiary and whose signature is notarized, is equal to $____________, which amount is equal to $5,000,000 or a multiple thereof. (3) The amount of the Demand accompanying this certificate was computed in accordance with the terms and conditions of the Letter of Credit and does not exceed the amount available to be drawn under the Letter of Credit. The Beneficiary acknowledges that, pursuant to the terms of the Letter of Credit, upon delivery or transmission of the Demand accompanying this certificate, the amount of the Letter of Credit and the amounts available to be drawn by the beneficiary thereunder by any subsequent drawing are automatically and irreversibly decreased by an amount equal to the amount of this drawing. IN WITNESS WHEREOF, the Beneficiary has executed and delivered this certificate as of the _____ day of _______, _______. SCIOS NOVA INC. By: -------------------------- -------------------------- Name -------------------------- Title ANNEX B ------- FORM OF DEMAND -------------- Swiss Bank Corporation 101 California Street San Francisco, California 94111 Attention: Nancy Stoll and David Parrot This Demand is made under Swiss Bank Corporation, San Francisco Branch Irrevocable Letter of Credit No. V561116 (the "Letter of Credit") issued for the account of Genentech, Inc., a Delaware corporation. The amount drawn hereby is $___________, and the certificate required by such Letter of Credit is attached hereto. Very truly yours, SCIOS NOVA INC. By: -------------------------- -------------------------- Name -------------------------- Title ANNEX C ------- CERTIFICATE FOR A "DEFAULT DRAWING" SWISS BANK CORPORATION, SAN FRANCISCO BRANCH IRREVOCABLE LETTER OF CREDIT NO. V561116 The undersigned Beneficiary (the "Beneficiary"), hereby certifies to Swiss Bank Corporation, San Francisco (the "Bank"), with reference to Irrevocable Letter of Credit No. V561116 (the "Letter of Credit", the terms defined therein and not otherwise defined herein being used herein as therein defined) issued by the Bank in favor of the Beneficiary, that: (1) The Beneficiary is making a drawing under the Letter of Credit with respect to the Lending Facility, dated as of December 30, 1994 between the Beneficiary and the Corporation. (2) This certificate and the accompanying Demand shall be effective only if the Bank sends the Beneficiary a notice of an event of default under the Reimbursement Agreement and shall be deemed to be presented to the Bank at the opening of business on the fifth Business Day following the sending of such notice, but preceding the termination of the Letter of Credit (the "Presentation Date"). (3) The amount of the Demand accompanying this certificate, which Demand has been executed by one of the President, the Vice President-Finance and the General Counsel of the Beneficiary and whose signature is notarized, is equal to the aggregate amount available to be drawn under the Letter of Credit on the Presentation Date. (4) The certificate may be rescinded by a writing signed by any one of the President, the Vice President-Finance and the General Counsel of the Beneficiary addressed to the Bank and delivered to the Bank pursuant to the provisions of the Letter of Credit by the close of business on the Business Day next preceding the Presentation Date. The Beneficiary acknowledges that, pursuant to the terms of the Letter of Credit, upon payment of the Demand accompanying this certificate, the amount of the Letter of Credit is automatically and irreversible decreased to zero, and the Letter of Credit terminates. IN WITNESS WHEREOF, the Beneficiary has executed and delivered this certificate as of the 30th day of December, 1994. SCIOS NOVA INC. By: -------------------------- -------------------------- Name -------------------------- Title EX-11.1 6 EXHIBIT 11.1 SCIOS NOVA INC. Computation of Net Loss Per Share (Calculated in accordance with the guidelines of item 601 of Regulation S-K. The effect of stock options on loss per share is anti-dilutive).
Year Ended December 31, 1994 1993 1992 ---- ---- ---- PRIMARY: Average common shares outstanding $35,219,442 $34,768,195 $22,915,336 Net effect of dilutive stock options - based on treasury stock method 292,341 486,855 928,240 ------------- ------------- -------------- Average common and common equivalent shares outstanding 35,511,783 35,255,050 23,843,576 ------------- ------------- -------------- ------------- ------------- -------------- Net loss $(27,961,000) $(36,579,000) $(131,946,000) ------------- ------------- -------------- ------------- ------------- -------------- Net loss per share $ (.79) $ (1.04) $ (5.53) ------------- ------------- -------------- ------------- ------------- -------------- FULLY DILUTED: Average common shares outstanding 35,219,442 34,768,195 22,915,336 Net effect of dilutive stock options - based on treasury stock method 291,847 1,291,326 925,577 ------------- ------------- -------------- Average common and common equivalent - shares outstanding 35,511,289 36,059,521 23,840,913 ------------- ------------- -------------- ------------- ------------- -------------- Net loss $ 27,961,000 $(36,579,000) $(131,946,000) ------------- ------------- -------------- ------------- ------------- -------------- Net loss per share $ (.79) $ (1.01) $ (5.53) ------------- ------------- -------------- ------------- ------------- --------------
See notes to consolidated financial statements Exhibit 11.1 EX-22.1 7 EXHIBIT 22.1 EXHIBIT 22.1 SUBSIDIARIES OF REGISTRANT California Biotechnology Research Inc., a California corporation Bio-Shore Management Corp., a California corporation Guilford Pharmaceuticals Inc., a Delaware corporation SN Properties Inc., a Maryland corporation EX-24.1 8 EXHIBIT 24.1 EXHIBIT 24.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Scios Nova Inc. on Form S-8 (File No. 2-90477, File No. 2-97606, File No. 33- 39878 and File No. 33-51590) and Form S-3 (File No. 33-18958 and File No. 33- 88800) of our report dated February 1, 1995 on our audits of the consolidated financial statements of Scios Nova Inc. and subsidiaries as of December 31, 1994 and 1993 and for each of the three years in the period ended December 31, 1994 which report is included in this Annual Report on Form 10-K. /s/ COOPERS & LYBRAND L.L.P. San Jose, California March 30, 1995 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED 12-31-94 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 29,674 74,765 3,599 0 0 56,861 61,650 26,532 146,096 17,919 1,739 35 0 0 126,403 146,096 42,792 53,667 26,541 31,714 53,672 0 0 (27,961) 0 (27,961) 0 0 0 (27,961) (0.79) (0.79)