-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NTYEDGgO9SajwlpRacttHxRyssu9j/P11MLWbQhsF6+KFFJXV3hrXsNBz6oIy/yk NRZTLH3xsvzC95Fg6r4p/g== 0000912057-97-011227.txt : 19970401 0000912057-97-011227.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011227 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DURA PHARMACEUTICALS INC/CA CENTRAL INDEX KEY: 0000882098 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 953645543 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19809 FILM NUMBER: 97569783 BUSINESS ADDRESS: STREET 1: 5880 PACIFIC CENTER BLVD CITY: SAN DIEGO STATE: CA ZIP: 92121-4204 BUSINESS PHONE: 6194572553 MAIL ADDRESS: STREET 1: 5880 PACIFIC CENTER BLVD CITY: SAN DIEGO STATE: CA ZIP: 92121-4204 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ----- EXCHANGE ACT OF 1934 For fiscal year ended December 31, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ----- SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ________ to ________. COMMISSION FILE NUMBER: 000-19809 DURA PHARMACEUTICALS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-3645543 (State or other jurisdiction (I.R.S. Employer or incorporation or organization) Identification No.) 5880 Pacific Center Blvd. San Diego, California 92121-4202 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code (619) 457-2553 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, NO PAR VALUE 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 [ ]. The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 28, 1997 was $1,457,451,662. For the purposes of this calculation, shares owned by officers, directors (and their affiliates) and 10% or greater shareholders known to the registrant have been deemed to be affiliates. The number of shares of the Registrant's Common Stock outstanding as of February 28, 1997 was 43,437,978. Portions of Registrant's Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 28, 1997, to be filed with the Securities and Exchange Commission on or about April 16, 1997, referred to herein as the "Proxy Statement," are incorporated as provided in Part III, and portions of the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1996, attached hereto as Exhibit 13, referred to herein as the "Annual Report," are incorporated as provided in parts II and IV. INDEX Part I: Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . 4-22 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . 22 Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 22 Item 4. Submission of Matters to the Vote of Security Holders. . 22 Part II: Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. . . . . . . . . . . . . . . . . . . 23 Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . 23 Item 8. Financial Statements and Supplementary Data. . . . . . . 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . . . . 23 Part III: Item 10. Directors and Executive Officers of the Registrant . . . 24 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . 24 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . 24 Item 13. Certain Relationships and Related Transactions . . . . . 24 Part IV: Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . .25-28 Signatures . . . . . . . . . . . . . . . . . . . . . . . 29 PART I ITEM 1. BUSINESS THE DISCUSSION OF THE COMPANY'S BUSINESS CONTAINED IN THIS REPORT MAY CONTAIN CERTAIN FORWARD-LOOKING STATEMENTS. FOR A DISCUSSION OF FACTORS WHICH MAY AFFECT THE OUTCOME PROJECTED IN SUCH STATEMENTS, SEE "RISKS AND UNCERTAINTIES" ON PAGES 16 THROUGH 22 OF THIS ANNUAL REPORT ON FORM 10-K. THE COMPANY UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS AND CIRCUMSTANCES ARISING AFTER THE DATE HEREOF. OVERVIEW Dura Pharmaceuticals, Inc. ("Dura" or the "Company") is a specialty respiratory pharmaceutical and pulmonary drug delivery company. The Company is engaged in developing and marketing prescription pharmaceutical products for the treatment of asthma, hay fever, chronic obstructive pulmonary disease ("COPD"), the common cold, related respiratory ailments and is developing a pulmonary drug delivery system. Dura has strategically focused on the U.S. Respiratory Market because of its size (approximately $9.5 billion in sales in 1996) and growth opportunities. Additionally, the fragmented nature of the market and the identifiable base of physician prescribers allow the Company to achieve significant market penetration with a specialized sales force. The Company currently markets 29 prescription products, including 25 which are off-patent. The Company also has a separate mail service pharmacy, Health Script Pharmacy Services, Inc. ("Health Script"), which dispenses respiratory pharmaceuticals. Dura employs a dual marketing strategy utilizing its focused field sales force of 182 people and a dedicated managed care sales and marketing group that covers managed care organizations and retail pharmacy chains. Dura's field sales force targets a physician base which includes approximately 80,000 U.S. allergists, ear, nose, and throat specialists ("ENTs"), pulmonologists and a selected subset of pediatricians and generalist physicians, who the Company believes collectively write approximately 75% of respiratory pharmaceutical prescriptions. Dura believes that its field sales force calls on approximately one-half of the target physician base. The Company's managed care sales and marketing group concentrates on sales to large regional and national managed care organizations. The Company expects to continue expanding both the field sales force and the managed care sales and marketing group as warranted by market opportunities. This marketing strategy has allowed Dura to leverage its distribution capabilities by acquiring the rights to market additional prescription pharmaceutical products through acquisition, in-license or co-promotion arrangements. Since 1992, the Company has acquired 20 products targeted at the U.S. respiratory market. In July 1996, the Company acquired from Procter & Gamble Pharmaceuticals, Inc. ("P&G") worldwide rights to the Entex-Registered Trademark- products, consisting of four prescription upper respiratory drugs. In September 1996, the Company acquired from Eli Lilly and Company ("Lilly") U.S. marketing rights to the antibiotics Keftab-Registered Trademark- and Ceclor-Registered Trademark- CD. The Company began marketing Keftab in September 1996, and launched Ceclor CD in October 1996. Another key component of Dura's strategy is to develop the Spiros-TM- pulmonary drug delivery system ("Spiros"). Spiros is being designed to aerosolize pharmaceuticals in dry powder formulations for delivery to the lungs while providing certain advantages over other currently-used methods of pulmonary drug delivery. The Company has a three-level development program for Spiros which entails (i) developing, on behalf of Spiros Development Corporation ("Spiros Corp."), certain drug applications for use in Spiros, including in the near-term albuterol, beclomethasone and ipratropium, three of the most frequently prescribed pharmaceutical agents to treat respiratory conditions, (ii) licensing Spiros primarily to pharmaceutical companies, including Mitsubishi Chemical Corporation ("Mitsubishi") and Fujisawa Pharmaceuticals Co., Ltd. ("Fujisawa"), generally for use with certain of their proprietary respiratory products, and (iii) developing Spiros, generally in collaboration with third parties, for the systemic delivery of compounds, including certain proteins and peptides, through the lungs for respiratory and non-respiratory indications as an alternative to current invasive delivery techniques. The Company has licensed certain rights to Spiros Corp. to continue a significant portion of the development program for Spiros, including funding of ongoing and future clinical trials of albuterol and beclomethasone in Spiros, and formulation, preclinical development and clinical trials of ipratropium in Spiros. The Company has the right to purchase all of the currently outstanding shares of callable common stock of Spiros Corp. through December 31, 1999 at predetermined prices. 4 In July 1996, the Company commenced long-term and short-term clinical trials which, along with earlier studies, are intended to serve as the basis for the filing of a New Drug Application ("NDA") by Dura in late 1997 seeking U.S. Food and Drug Administration ("FDA") approval, on behalf of Spiros Corp., to market albuterol in the Spiros cassette system. The patient dosing clinical studies which the Company believes to be necessary for this submission have been completed. The Company has also filed on behalf of Spiors Corp., an Investigational New Drug ("IND") Application for U.S. studies on beclomethasone in the Spiros cassette system. In the first quarter of 1997, clinical trials of beclomethasone in the U.S. commenced under this IND. In addition, Dura, on behalf of Spiros Corp., has performed powder formulation work with the peptide drug salmon calcitonin which in a clinical trial demonstrated the ability to develop macromolecule aerosol powder formulation which achieved systemic delivery using the Spiros technology. U.S. RESPIRATORY MARKET Dura divides the U.S. Respiratory Market into two primary markets: (i) asthma and COPD; and (ii) respiratory infection, allergy, and cough and cold. ASTHMA AND COPD Asthma is a complex physiological disorder characterized by airway hyperactivity to a variety of stimuli such as dust, pollen, stress or physical exercise, resulting in airway obstruction that is partially or temporarily reversible. The U.S. asthma population has grown steadily to more than 15 million people, a 66% rise since 1980. COPD is a complex condition comprising a combination of chronic bronchitis, emphysema and airway obstruction. The disease affects males more often than females and is exacerbated by smoking and other insults to the lung. Incidence is as high as 20% of the adult male population, though only a minority are clinically disabled. The U.S. combined market for therapeutic drugs to treat asthma and COPD was over $2.8 billion in 1996. The primary categories of therapeutic drugs used in the treatment of asthma and COPD include bronchodilators and anti-inflammatories. Bronchodilators dilate the airways and include beta agonists (such as bitolterol and albuterol), xanthines (such as theophylline) and anticholinergics (such as ipratropium). Anti-inflammatories reduce inflammation and include cromolyns and glucocorticoids (such as triamcinolone, beclomethasone, flunisolide and budesonide). RESPIRATORY INFECTION, ALLERGY, COUGH AND COLD Respiratory infections are generally caused by a variety of bacteria and can affect either the upper respiratory tract (nasal cavity, sinuses and throat) or the lower respiratory tract (lungs). The resulting diagnoses include sinusitis, tonsillitis, and bronchitis. These infections are treated with antibiotics, which kill the bacteria causing the symptoms. There are a variety of classes of antibiotics that treat specific ranges, or spectrums, of bacteria. Classes used to treat respiratory infection include cephalosporins, broad spectrum macrolides, and quinolores. The market for these classes is very large, totaling $4.6 million in 1996 for the oral solid forms alone. The cephalosprin class accounts for approximately $1.3 billion of this total. While the causes of allergies (which can be seasonal or perennial) and cough and colds differ, nasal congestion and sneezing are common symptoms of these diseases. The U.S. combined market for therapeutic drugs to treat allergies, cough and cold was over $2.1 billion in 1996. Antihistamines and antihistamine/decongestant combinations are the most widely used forms of therapy for allergies and represent the largest portion of the allergy, cough and cold market in the U.S. Cough and cold preparations represent the next largest portion of the allergy, cough and cold market and include decongestant and decongestant/expectorant combinations, cough suppressants and antihistamine combinations and expectorants. 5 STRATEGY The Company's objective is to be a leading supplier of respiratory pharmaceuticals and pulmonary drug delivery systems. The Company attempts to achieve this objective through the implementation of the following: - - FOCUSING MARKETING EFFORTS ON RESPIRATORY PHYSICIAN SPECIALISTS. Dura employs a dual marketing strategy utilizing its focused field sales force and a dedicated managed care sales and marketing group. Dura's field sales force targets a physician base which includes approximately 80,000 U.S. allergists, ENTs, pulmonologists and a selected subset of pediatricians and generalist physicians, who the Company believes collectively write approximately 75% of respiratory pharmaceutical prescriptions. Dura believes that its field sales force calls on approximately one-half of the target physician base. The Company's managed care sales and marketing group concentrates on sales to large regional and national managed care organizations. The Company expects to continue expanding both the field sales force and the managed care sales and marketing group as warranted by market opportunities. - - ACQUIRING, IN-LICENSING OR CO-PROMOTING RESPIRATORY PRESCRIPTION PHARMACEUTICALS. The Company seeks to acquire, in-license or co-promote respiratory prescription pharmaceuticals or companies developing and/or marketing such pharmaceuticals. The Company is particularly focused on respiratory drugs that are under-promoted by large pharmaceutical companies. The Company believes that the pharmaceutical industry is undergoing a restructuring that may create greater opportunities for the Company. For example, many large pharmaceutical companies are consolidating and merging and/or redirecting their sales forces, which may lead to the underpromotion of certain products deemed too small for large sales forces and create significant acquisition, in-licensing and co-promotion opportunities. Additionally, consolidation within the sector may make small product lines less desirable to large pharmaceutical companies. The Company is actively pursuing the acquisition of rights to products and/or companies, which may require the use of substantial capital resources. - - DEVELOPING SPIROS. The Company has a three-level development program for Spiros which entails (i) developing, on behalf of Spiros Corp., certain drug applications for use in Spiros, including in the near term albuterol, beclomethasone and ipratropium, three of the most frequently-prescribed pharmaceutical agents to treat respiratory conditions, (ii) licensing Spiros primarily to pharmaceutical companies generally for use with certain of their proprietary respiratory products, and (iii) developing Spiros, generally in collaboration with third parties, for the systemic delivery of compounds, including certain proteins and peptides, through the lungs for respiratory and non-respiratory indications as an alternative to current invasive delivery techniques. These Spiros development programs are currently being undertaken primarily through strategic relationships with Spiros Corp., Mitsubishi, Fujisawa, and Houghten Pharmaceuticals, Inc. ("Houghten"). 6 DURA'S CURRENT PRODUCTS The following prescription pharmaceuticals are currently being marketed by Dura in the following therapeutic categories:
RIGHTS YEAR OBTAINED FROM OR INTRODUCED PRODUCTS DEVELOPED BY BY DURA -------- ---------------------- ---------- ASTHMA AND COPD TORNALATE-Registered Trademark- METERED DOSE INHALER (bitolterol mesylate) . . . . . . . . . Sanofi-Winthrop, Inc. 1993 TORNALATE-Registered Trademark- SOLUTION FOR INHALATION, 0.2% (bitolterol mesylate). . . . . Sanofi-Winthrop, Inc. 1992 ALLERGY, COUGH AND COLD DURA-VENT-Registered Trademark- TABLETS (phenylpropanolamine HC1, guaifenesin) . . . . . . . Dura Pre-1989 DURA-VENT/DA-Registered Trademark- TABLETS (chlorpheniramine maleate, phenylephrine HC1, methscopolamine nitrate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dura Pre-1989 D.A. CHEWABLE-TM- TABLETS (chlorpheniramine maleate, phenylephrine HC1, methscopolamine nitrate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dura 1991 D.A. II-TM- TABLETS (chlorpheniramine maleate, phenylephrine HC1, methscopolamine nitrate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dura 1996 DURA-TAP-Registered Trademark-/PD CAPSULES (chlorpheniramine maleate, pseudoephedrine HC1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dura Pre-1989 DURA-VENT-Registered Trademark-A CAPSULES (chlorpheniramine maleate, phenylpropanolamine HC1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dura Pre-1989 DURA-GEST-Registered Trademark- CAPSULES (phenylephrine HC1, phenylpropanolamine HC1, guaifenesin) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dura Pre-1989 FENESIN-TM- TABLETS (guaifenesin). . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dura Pre-1989 FENESIN-TM- DM TABLETS (guaifenesin, dextromethorphan hydrobromide). . . . . . . . . . . . Dura 1994 GUAI-VENT-TM-PSE TABLETS (pseudoephedrine HC1, guaifenesin). . . . . . . . . . . . . . . . Dura 1994 CROLOM -TM-(cromolyn sodium opthalmic solution USP 9%) . . . . . . . . . . . . . . . . . . Bausch & Lomb 1995 RONDEC-Registered Trademark- ORAL DROPS (carbinoxamine maleate, pseudoephedrine hydrochloride) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Abbott 1995 RONDEC-Registered Trademark- SYRUP (carbinoxamine maleate, pseudoephedrine hydrochloride) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Abbott 1995 RONDEC-Registered Trademark--TR TABLET (carbinoxamine maleate, pseudoephedrine hydrochloride) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Abbott 1995 RONDEC-Registered Trademark- TABLET (carbinoxamine maleate, pseudoephedrine hydrochloride) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Abbott 1995 RONDEC-Registered Trademark--DM ORAL DROPS (carbinoxamine maleate, pseudoephedrine hydrochloride, dextromethorphan hydrobromide). . . . . . . . . . . . . . . . . . . . . . . Abbott 1995 RONDEC-Registered Trademark--DM SYRUP (carbinoxamine maleate, pseudoephedrine hydrochloride, dextromethorphan hydrobromide). . . . . . . . . . . . . . . . . . . . . . . Abbott 1995 RONDEC-Registered Trademark- CHEWABLE TABLETS (brompheniramine maleate, pseudoephedrine hydrochloride) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dura 1996 ENTEX-Registered Trademark- LA TABLETS (phenylpropanolamine HC1, guaifenesin). . . . . . . P&G 1996 ENTEX-Registered Trademark- PSE TABLETS (pseudoephedrine HC1, guaifenesin) . . . . . . . . P&G 1996 ENTEX-Registered Trademark- CAPSULES (phenylephrine HC1, phenylpropanolamine HC1, guaifenesin) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P&G 1996 ENTEX-Registered Trademark- LIQUID (phenylephrine HC1, phenylpropanolamine HC1, guaifenesin) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P&G 1996 ANTIBIOTICS CAPASTAT-Registered Trademark- SULFATE (sterile capreomycin sulfate, USP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lilly 1995 SEROMYCIN-Registered Trademark- (cycloserine capsules, USP). . . . . . . . . . . . . . . . Lilly 1995 FURADANTIN-Registered Trademark- ORAL SUSPENSION (nitrofurantoin). . . . . . . . . . . . . P&G 1996 KEFTAB-Registered Trademark- (cephalexin hydrochloride). . . . . . . . . . . . . . . . . . Lilly 1996 CECLOR-Registered Trademark- CD TABLETS (anhydrous cefaclor) . . . . . . . . . . . . . . . Lilly 1996
In July 1996, the Company acquired from P&G worldwide rights to the Entex products consisting of four prescription upper respiratory drugs. In September 1996, the Company acquired from Lilly the U.S. rights to the cephalosporin antibiotics Keftab and Ceclor CD. The U.S. oral antibiotic market was $4.6 billion in 1996, of which approximately $1.3 billion was accounted for by cephalosporin antibiotics. The Company believes that this acquisition complements its existing strategy since approximately 70% of antibiotics are prescribed for respiratory infections. Keftab is an antibiotic indicated for respiratory tract, skin and soft tissue infections. Ceclor CD is a twice-a-day dosage form of cefaclor typically taken for seven days. Ceclor-Registered Trademark-, Lilly's currently marketed cefaclor, is normally taken three times a day for 10 days, and generated $161.0 million in sales in the United States for the 12 months ended June 30, 1996. The Company launched Ceclor CD in October 1996. The Company believes these product acquisitions further its strategy 7 of acquiring prescription pharmaceuticals which are marketed by its sales force to its targeted physicians. To support the introduction and growth of these products, the Company intends to increase its field sales force to approximately 250 people during 1997. Keftab, Ceclor CD, Capastat-Registered Trademark- Sulfate, Seromycin-Registered Trademark-, and the two Tornalate-Registered Trademark- products are the subject of approved NDAs. Crolom-TM- is the subject of an approved Abbreviated New Drug Applications ("ANDA"). The remaining products are branded pharmaceuticals which are not the subject of NDAs or ANDAs. SPIROS Spiros is a proprietary pulmonary dry powder drug delivery system that is designed to aerosolize pharmaceuticals in dry powder formulations for delivery to the lungs. Currently, metered dose inhalers ("MDIs") are the most commonly used inhalation delivery system. The Company believes dry powder inhalers ("DPIs") will gradually replace MDIs as the leading pulmonary delivery system, due primarily to the phasing out of chlorofluoro carbons ("CFCs") and coordination problems associated with MDIs. Many companies are studying alternative propellants, such as hydrofluorocarbons ("HFAs"), for use in MDIs, and one potential competitor has obtained FDA approval and has began marketing an albuterol MDI using an HFA propellant. However, the Company believes any product utilizing alternative propellants will still suffer from many of the limitations of currently-marketed MDIs, including the need for patients to coordinate breathing with actuation of the drug delivery system. There are currently two general classes of DPIs in commercial use worldwide, individual and multiple dose systems, and both are breath powered and flow rate dependent. In the U.S., only individual dose DPIs are marketed. Turbuhaler-Registered Trademark-, a multiple dose DPI and the leading DPI in worldwide sales, is considered the current industry standard. It has not yet been approved by the FDA for marketing in the U.S., although the FDA has issued an approvable letter for the first Turbuhaler product. POTENTIAL ADVANTAGES OF SPIROS The Company believes Spiros may have certain advantages over other currently used methods of drug delivery including the following: - - INSPIRATORY FLOW RATE INDEPENDENCE. Spiros is designed to deliver a relatively consistent drug dose to the lungs over a wide range of inspiratory flow rates, which can vary depending on a patient's health, effort or physical abilities. Recently-completed tests of Spiros on human subjects have shown a relatively consistent and significant level of drug deposition throughout the clinically relevant inspiratory range. Currently- available DPIs can vary significantly in their level of drug deposition depending on the patient's inspiratory flow rate and can deliver significantly less drug at the lower flow rates typically associated with asthma attacks. - - MINIMUM NEED FOR PATIENT COORDINATION. Spiros is breath-actuated and does not require the user to coordinate inhalation and actuation of the drug delivery system. MDIs generally require the user to coordinate their breathing with actuation of the MDI. Studies indicate that a significant percentage of patients, particularly young children and the elderly, do not use MDIs correctly. Spiros is designed to solve these coordination problems by delivering the drug to patients' lungs as they inhale. - - FREE OF CHLOROFLUOROCARBON PROPELLANTS. CFC propellants have ozone destructive characteristics and are subject to worldwide regulations aimed at eliminating their usage within the decade. Spiros will not use CFCs while most MDIs, currently the most popular form of aerosol drug delivery, use CFCs. Virtually all of the world's industrial nations, under the auspices of the United Nations Environmental Program, pledged to cease use of CFCs by the year 2000. As a result of the phase out of CFCs, the Company believes that DPIs will become a leading method for pulmonary drug delivery. 8 - - REDUCED SIDE EFFECTS. Spiros is designed to efficiently deliver drugs to the lungs thereby reducing drug deposition to the mouth and throat which could reduce the possibility of unwanted side effects of certain pharmaceutical agents, such as coughing and local irritation. With MDIs, a significant portion of the dose is delivered to the mouth and throat and is swallowed. - - PATIENT CONVENIENCE. Spiros is designed to be convenient for patients, with features such as breath actuation (Spiros is triggered by inhalation), portability (light weight and small size), quick delivery time, simple operation, dose delivery feedback and multi-dose capability. DEVELOPMENT PROGRAM FOR SPIROS The Company intends to proceed with a three-level development program for Spiros. The first level entails developing certain drug applications for use in Spiros, including in the near-term albuterol, beclomethasone and ipratropium, three of the most frequently-prescribed pharmaceutical agents to treat respiratory conditions. The Company, on behalf of Spiros, is engaged in on- going discussions with the FDA regarding clinical testing requirements for Spiros for albuterol, beclomethasone and ipratropium aimed at facilitating the regulatory approval process. In 1994, an IND application was filed with the FDA to begin clinical testing with Dura's own albuterol dry powder formulation with the Spiros cassette system. Dura has exclusively licensed rights to this formulation to Spiros Corp. In April 1996, Dura completed dosing of subjects in a clinical trial in the United States on behalf of Spiros Corp. focusing on dose selection using a formulation of powdered albuterol with Spiros under an IND application filed with the FDA. In July 1996, the Company commenced long-term and short-term clinical trials which, along with earlier studies, are intended to serve as the basis for the filing of an NDA by Dura in 1997 seeking FDA marketing approval, on behalf of Spiros Corp., for albuterol in the Spiros cassette system. In early 1997, the Company completed the patient dosing clinical studies it believes are necessary to support an NDA filing for Spiros albuterol and intends to file an NDA in late 1997. Considerable formulation work for use of beclomethasone with Spiros has also been done. A study has been completed in Canada to evaluate dose selection in 24 subjects. The Company has commenced a second dose selection study in the U.S. under an IND application for beclomethasone in Spiros which was filed by Dura on behalf of Spiros Corp. The Company also intends to conduct clinical trials on ipratropium in the Spiros system on behalf of Spiros Corp. Dura, on behalf of Spiros Corp., has performed powder formulation work with the peptide drug salmon calcitonin which, in a clinical trial, demonstrated the ability to develop macromolecule aerosol powder formulation that achieved systemic delivery using the Spiros technology. Particle size reduction appropriate for aerosol administration was achieved, and IN VITRO measurements showed good aerosol characteristics in Spiros. The formulation was sufficiently stable, and a clinical trial batch was manufactured in Dura's facility. The second level of Spiros development consists of licensing Spiros primarily to pharmaceutical companies for use with certain of their proprietary respiratory products. Dura currently has development agreements with Fujisawa and Mitsubishi and is conducting feasibility studies for other pharmaceutical companies to assess the suitability of certain compounds to be delivered using Spiros. There can be no assurance that any of these feasibility studies will prove successful, or even if successful, that the pharmaceutical companies will proceed to license Spiros for use with these compounds. See "-- Strategic Alliances." 9 The third level of Spiros development is to develop Spiros, in collaboration with other companies, for the systemic delivery of compounds through the lungs for respiratory and non-respiratory indications as an alternative to current invasive delivery techniques. The Company commenced development efforts on the use of Spiros with peptides and proteins in 1995. In February 1996, Dura entered into a collaborative agreement with Houghten to develop inhalation formulations of new compounds discovered and developed by Houghten. Dura is also performing feasibility studies for pharmaceutical companies that desire to develop Spiros for use with both respiratory drugs and drugs for systemic pulmonary delivery now being developed by those companies. See "-- Strategic Alliances." SALES AND MARKETING FIELD SALES FORCE Dura's specialized sales and marketing organization targets a physician base which includes approximately 80,000 U.S. allergists, ENTs, pulmonologists, and a selected subset of pediatricians and generalist physicians who treat a large number of allergy and asthma patients. The Company believes this relatively small group of physicians writes approximately 75% of respiratory pharmaceutical prescriptions for the $9.5 billion U.S. Respiratory Market. This concentration allows for effective market penetration by a specialized sales and marketing organization. As of December 31, 1996, Dura had 182 full-time pharmaceutical sales representatives nationwide, supervised by 17 district managers and two regional directors. Dura believes its focused sales force currently calls on approximately one-half of its target physician base. The Company intends to continue expansion of its field sales force as warranted by market opportunities. The Company believes that the personal relationships of Dura's sales representatives with their physician customers are essential to the Company's business. Dura's sales representatives differentiate themselves from the competition by focusing primarily on asthma and COPD, allergy, repiratory infections, and cough and cold, and by promoting pharmaceuticals used by respiratory specialists in treating patients. With a relatively small target audience, promotional spending by Dura on advertising and direct mail is generally inexpensive and efficient. The Company regularly participates in local, regional and national medical meetings of the key specialty groups. The Company believes that it has established a national awareness of the Dura name within the U.S. Respiratory Market. MANAGED CARE SALES AND MARKETING GROUP To implement Dura's dual marketing strategy, the Company established a dedicated managed care sales and marketing group, currently consisting of four experienced national account managers, which concentrates on sales to large regional and national managed care organizations. These organizations include health maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"), large drug merchandising chains, nursing home providers and mail order pharmacies. A primary goal of the managed care sales and marketing group is to place Dura's products on approved formulary lists of HMOs and PPOs. HEALTH SCRIPT In March 1995, the Company acquired Health Script, located in Denver, Colorado. Health Script is a mail service pharmacy which dispenses respiratory pharmaceuticals. Mail order services are particularly well-suited for respiratory patients who are long-term, chronic users of certain pharmaceuticals and to whom the convenience and cost efficiency of mail order is appealing. Health Script was formed in 1990 to supply value-priced respiratory pharmaceutical products to patients through the mail. Health Script currently dispenses, to its approximately 30,000 patients nationwide, over 100 respiratory products manufactured by third parties. Health Script is focused on working with home healthcare providers and patients to coordinate respiratory medication services and patients management programs. Health Script markets its services through specialty field sales representatives and telemarketing. The existing patient base is 10 maintained by telephone contact with patients to monitor compliance with their doctors' prescriptions. RELATIONSHIP WITH SPIROS CORP. In December 1995, Spiros Corp. completed a $28.0 million private placement. The net proceeds of this private placement and a $13.0 million cash contribution from Dura are being used by Spiros Corp. to continue a significant portion of the development program for Spiros, including funding of formulation, preclinical development and ongoing and future clinical trials of albuterol, beclomethasone and ipratropium in Spiros. The financing involved the issuance and sale of 933,334 units at $30.00 per unit. Each unit consisted of one share of Spiros Corp. callable common stock and one Series S Warrant exercisable for 2.4 shares of the Company's common stock at an exercise price of $19.47 per share. In consideration for the issuance of the Series S Warrants and Dura's cash contribution, the Company received an option, which can be exercised through December 31, 1999, to purchase all of the currently outstanding shares of Spiros Corp. callable common stock at predetermined prices, beginning at $46.88 per share (an aggregate of $43.7 million) through December 31, 1997 and increasing on a quarterly basis thereafter to a maximum of $76.17 per share (an aggregate of $71.1 million) on December 31, 1999 ("Spiros Purchase Option"). Such purchase price may be paid, at the Company's discretion, in cash, shares of the Company's common stock or a combination thereof. Any shares of common stock delivered in payment of the purchase price must be covered by an effective registration statement. If the development efforts of Spiros Corp. are successful, the Company may exercise its right to purchase Spiros Corp.'s callable common stock; however, the Company does not have a legal obligation to do so. In addition, Dura has the option at any time through the earlier of 60 days after FDA approval of an albuterol product or December 31, 1999, to purchase Spiros Corp's. rights for use of Spiros with albuterol product in a cassette ("Albuterol Purchase Option"). In the event Dura exercises the Albuterol Purchase Option and does not exercise the Spiros Purchase Option, Dura will pay a royalty to Spiros Corp. on net sales of such albuterol product. In connection with the private placement, the Company entered into the following agreements with Spiros Corp.: - - TECHNOLOGY LICENSE AGREEMENT. Under this agreement, the Company granted to Spiros Corp., subject to existing agreements with Mitsubishi, a royalty- bearing, perpetual, exclusive license to use Spiros in connection with albuterol, beclomethasone and ipratropium and certain other proteins and peptides (including salmon calcitonin) and certain non-exclusive rights to all other compounds to which Dura has or acquires rights capable of transfer during the term of the Development and Management Agreement. - - INTERIM MANUFACTURING AND MARKETING AGREEMENT. Under this agreement, Spiros Corp. granted to the Company an exclusive license to manufacture and market Spiros Corp. products in the U.S. in exchange for a royalty of 10.0% on net product sales, as defined in the agreement. This agreement expires upon termination or expiration of the Spiros Purchase Option. - - DEVELOPMENT AND MANAGEMENT AGREEMENT. Under this agreement, Spiros Corp. engaged the Company to develop the Spiros Corp. products and provide general management services to Spiros Corp. During 1996, the Company recorded contract revenues of $19,138,000 under this agreement. STRATEGIC ALLIANCES MITSUBISHI CHEMICAL CORPORATION. In October 1994, Dura and Mitsubishi entered into a license and supply agreement, under which Mitsubishi was granted the exclusive right to use and sell Spiros together with a dry powder formulation of an asthma compound in Japan, Hong Kong, Singapore, the Republic of China (Taiwan), the Republic of Korea and the People's Republic of China (collectively the "Territory"). Dura's rights under the agreement were assigned to Spiros Corp. in December 1995. Spiros Corp. has agreed to develop a dry powder formulation of such compound for Mitsubishi and will manufacture and supply to 11 Mitsubishi its requirements for both Spiros and such compound. Mitsubishi will be responsible for conducting all clinical and other work needed to obtain regulatory approvals of Spiros and such compound in the Territory. In connection with the license and supply agreement, Mitsubishi is obligated to make milestone and other payments to Dura and Spiros Corp. in certain circumstances. FUJISAWA PHARMACEUTICAL CO., LTD. In April 1995, the Company entered into a collaborative development agreement with Fujisawa covering the use of Spiros to deliver one of Fujisawa's new chemical entity asthma compounds. The agreement was an extension of previous feasibility work completed by Dura. Pursuant to the agreement, the Company will provide dry powder formulation assistance, manufacturing process development and clinical trial supplies to Fujisawa through the earlier of completion of clinical trials in Japan or June 30, 1998. The Company received an up-front payment and is to receive additional milestone payments and reimbursement of costs from Fujisawa. Fujisawa can terminate the agreement upon 30 days' notice to the Company. If Fujisawa's clinical trials are successful, the parties have agreed to negotiate additional agreements, which could include license and supply agreements. HOUGHTEN PHARMACEUTICALS, INC. In February 1996, the Company entered into a research and development agreement with Houghten to develop inhalation formulations of new compounds discovered and developed by Houghten. In addition, Dura will provide to Houghten, for a four-year period, contract services for Houghten's drug development programs using Dura's development capabilities and proprietary formulation and delivery technology. The Company will receive a percentage of proceeds received by Houghten with respect to jointly-developed compounds, and will receive contract revenues from Houghten for services provided. In addition, the Company has executed agreements with a number of international pharmaceutical companies to conduct feasibility studies on formulations of certain compounds for use with Spiros, including growth hormones and proteins and peptides. There can be no assurance that any of these feasibility studies will prove successful, or even if successful, that the pharmaceutical companies will proceed to license Spiros for use with these compounds. COMPETITION The Company directly competes with at least 25 other companies in the U.S. which are currently engaged in developing, marketing and selling respiratory pharmaceuticals. Additionally, there are at least 10 companies currently involved in the development, marketing or sales of dry powder pulmonary drug delivery systems. In the U.S., only individual dose DPIs are marketed, including the Rotohaler (developed and marketed by Glaxo Wellcome, Inc.) and the Spinhaler (developed and marketed by Fisons Limited). The Turbuhaler (developed and marketed by Astra Pharmaceuticals), a multiple dose DPI and the leading DPI in worldwide sales, is considered the current industry standard. It is not yet marketed in the U.S., although the FDA has issued an approvable letter for the first Turbuhaler product. Many of these companies, including large pharmaceutical firms with financial and marketing resources and development capabilities substantially greater than those of the Company, are engaged in developing, marketing and selling products that compete with those offered by the Company. The selling prices of such products typically decline as competition increases. Further, other products now in use or under development by others may be more effective than the Company's current or future products. The industry is characterized by rapid technological change, and competitors may develop their products more rapidly than the Company. Competitors may also be able to complete the regulatory process sooner and, therefore, may begin to market their products in advance of the Company's products. Dura believes that competition among both prescription pharmaceuticals and pulmonary drug delivery systems aimed at asthma and allergy, cough and cold markets will be based on, among other things, product efficacy, safety, reliability, availability and price. 12 CLINICAL, DEVELOPMENT AND REGULATORY The Company's clinical, development and regulatory expenses relate primarily to product development and regulatory compliance activities. Clinical, development and regulatory expenses were $9,354,000, $8,408,000, and $18,540,000 for the years ended December 31, 1994, 1995 and 1996, respectively. The clinical, development and regulatory expenses associated with Spiros development, for which the Company recorded contract revenues from Dura Delivery Systems, Inc. (acquired by the Company on December 29, 1995) and Spiros Corp., were $8,260,000, $6,428,000, and $15,932,000 for the years ended December 31, 1994, 1995, and 1996, respectively. PATENTS AND PROPRIETARY RIGHTS The Company considers the protection of discoveries in connection with its development activities important to its business. The Company intends to seek patent protection in the U.S. and selected foreign countries where deemed appropriate. On July 12, 1994, the Company was issued a U.S. patent on Spiros and the Company has filed a continuation-in-part covering certain improvements to the Spiors techology. The issued patent covers, among other claims, use in Spiros of an impeller to create an aerosol cloud of a drug intended for inhalation. There can be no assurance that the issued patent or subsequent patents, if issued, will adequately protect the Company's design or that such patents will provide protection against infringement claims by competitors. Dura has also filed certain foreign patent applications relating to Spiros technology. There can be no assurance that additional patents, U.S. or foreign, will be obtained covering Company products or that, if issued or licensed to the Company, the patents covering Company products will provide substantial protection or be of commercial benefit to the Company. Federal court decisions establishing legal standards for determining the validity and scope of patents in the field are in transition. There can be no assurance that the historical legal standards surrounding questions of validity and scope will continue to be applied or that current defenses as to issued patents in the field will offer protection in the future. The Company also relies upon trade secrets, unpatented proprietary know-how and continuing technological innovation to develop its competitive position. The Company enters into confidentiality agreements with certain of its employees pursuant to which such employees agree to assign to the Company any inventions relating to the Company's business made by them while in the Company's employ. There can be no assurance, however, that others may not acquire or independently develop similar technology or, if patents are not issued with respect to products arising from research, that the Company will be able to maintain information pertinent to such research as proprietary technology or trade secrets. Tornalate Inhalation Solution and Tornalate MDI are covered by patents filed by Sanofi-Winthrop, Inc. which expire in the near-term. The Keftab and Ceclor CD products or processes to make such products are covered by patents which expire in 2003, 2005 and 2007. The Company's other asthma, allergy, cough and cold pharmaceuticals are not protected by patents. GOVERNMENT REGULATION The manufacturing and marketing of the Company's products are subject to regulation by Federal and state government authorities, including the FDA, the Environmental Protection Agency and the Occupational Safety and Health Administration, in the U.S. and other countries. In the U.S., pharmaceuticals and drug delivery systems, including Spiros, are also subject to rigorous FDA regulation and may be subject to regulation by other jurisdictions, including the state of California. The Federal Food, Drug, and Cosmetic Act and the Public Health Service Act govern the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of the Company's products. Product development and approval within this regulatory framework takes a number of years and involves the expenditure of substantial resources. 13 To obtain the FDA approval for Spiros and the compounds to be used with it, Dura is required to conduct each of the following steps and possibly others: (i) preclinical (laboratory and possibly animal tests), (ii) the submission to the FDA of an application for an IND, which must become effective before human clinical trials may commence, (iii) adequate and well-controlled human clinical trials to establish safety and efficacy, (iv) the submission of an NDA to the FDA and for marketing approval, and (v) FDA approval of the NDA prior to any commercial sale or shipment. In addition to obtaining FDA approval for each product, each domestic drug and/or device manufacturing facility must be registered with and approved by the FDA. Domestic manufacturing facilities are subject to biennial inspections by the FDA and inspections by other jurisdictions and must comply with current Good Manufacturing Practice ("cGMP") for both drugs and devices. To supply products for use in the U.S., foreign manufacturing establishments must comply with cGMP and other requirements and are subject to periodic inspection by the FDA or by regulatory authorities in such countries under reciprocal agreements with the FDA. Preclinical testing includes laboratory evaluation of product chemistry and animal studies, if appropriate, to assess the safety and efficacy of the product and its formulation. The results of the preclinical tests are submitted to the FDA as part of an IND, and unless the FDA objects, the IND will become effective 30 days following its receipt by the FDA, thus allowing the product to be tested in humans. Clinical trials involve the administration of the pharmaceutical product to healthy volunteers or to patients identified as having the condition for which the pharmaceutical agent is being tested. The pharmaceutical is administered under the supervision of a qualified principal investigator. Clinical trials are conducted in accordance with Good Clinical Practice and protocols previously submitted to the FDA (as part of the IND) that detail the objectives of the study, the parameters used to monitor safety and the efficacy criteria evaluated. Each clinical study is conducted under the auspices of an independent Institutional Review Board ("IRB") at the institution at which the study is conducted. The IRB considers, among other things, the design of the study, ethical factors, the safety of the human subjects and the possible liability risk for the institution. Clinical trials for new products are typically conducted in three sequential phases that may overlap. In Phase I, the initial introduction of the pharmaceutical into healthy human volunteers, the emphasis is on testing for safety (adverse effects), dosage tolerance, metabolism, distribution, excretion and clinical pharmacology. Phase II involves studies in a limited patient population to determine the initial efficacy of the pharmaceutical for specific targeted indications, to determine dosage tolerance and optimal dosage and to identify possible adverse side effect and safety risks. Once a compound is found to be effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to more fully evaluate clinical outcomes. The FDA reviews both the clinical plans and the results of the trials and may require the study to be discontinued at any time if there are significant safety issues. The results of the preclinical and clinical trials are submitted to the FDA in the form of an NDA (or a Product License Application for biological products) for marketing approval. FDA approval can take several months to several years, or approval may be denied. The approval process can be affected by a number of factors, including the severity of the side effects, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials. Additional animal studies or clinical trials may be requested during the FDA review process and may delay marketing approval. After FDA approval for the initial indication, further clinical trials are necessary to gain approval for the use of the product for any additional indications. The FDA may also require post-marketing testing and surveillance to monitor for adverse effects, which can involve significant additional expense. Although the FDA has considerable discretion to decide what requirements must be met prior to approval, the Company believes the FDA is likely to regulate each combination of Spiros with a compound as a discrete pharmaceutical or drug product requiring separate approval as a new drug. The Company believes that the approval process for each drug/delivery combination now under development may be shorter than the full NDA process described above because the safety and efficacy of the compounds have already been established in currently marketed formulations and delivery mechanisms. There can be no assurance, 14 however, that the approval process will be shorter or that any NDA submitted by the Company will eventually be approved. For both currently-marketed and future products, failure to comply with applicable regulatory requirements after obtaining regulatory approval can, among other things, result in the suspension of regulatory approval, as well as possible civil and criminal sanctions. In addition, changes in regulations could have a material adverse effect on the Company. The Federal Food, Drug, and Cosmetic Act requires that any "new drug" must be approved pursuant to an NDA. The term "new drug" is defined as any drug which is not generally recognized among qualified experts as safe and effective for its labeled intended uses. Certain exemptions from this definition exist for products marketed without change since prior to 1938 (the date of enactment of the Federal Food, Drug, and Cosmetic Act) or, with respect to the need to show effectiveness, for drug products marketed prior to October 10, 1962 (the date of enactment of the "Drug Amendments of 1962"). The Company presently markets 21 drug products for which the FDA has not yet made a determination as to their status as new drugs under the Federal Food, Drug, and Cosmetic Act. The FDA is continuing an evaluation of the effectiveness of all products containing ingredients marketed prior to 1962 that are not the subject of an approved NDA as part of its Drug Efficacy Study Implementation ("DESI") program and will determine which are new drugs requiring approval through an NDA for marketing. The existence of currently-marketed prescription pharmaceuticals that contain one or more active ingredients first introduced in the marketplace before 1962 and that are marketed based on their manufacturers' belief that such products are not subject to the new drug provisions of the Act is recognized in paragraph B ("Pre-1962 Prescription Drugs Not Covered By An NDA") of the Food and Drug Administration's Compliance Policy Guide, Chapter 32c (Guide 7132c.02). This Policy Guide indicates that the FDA will implement procedures to determine whether the new drug provisions are or are not applicable to these products. The Policy Guide requires that products covered by paragraph B not be similar or related to any drug included in the DESI program, or have a different formulation or conditions for use than products marketed before November 13, 1984. If a product is not covered by paragraph B, the FDA could make a determination as to whether or not the new drug provisions are applicable to it without first implementing the procedures called for by the Policy Guide. The Company believes that nine of its prescription pharmaceutical products may be covered by paragraph B of the Policy Guide and it is aware that one of its products may be considered to be similar or related to a DESI drug. Also, it is not aware of evidence to substantiate that three of its products have the same formulation or conditions for use as products marketed before November 13, 1984. These products could be subject at any time to an FDA determination that an NDA is required. If a final determination is made that a particular drug requires an approved NDA, such approval will be required for marketing to continue. If such a determination is made, the FDA might impose various requirements: for example, it might require that the current product be the subject of an approved NDA, that the product be reformulated and NDA approval obtained, that the product must be sold on an over-the-counter basis rather than as a prescription drug, or that the product must be removed from the market. There can be no such assurance as to which of these courses the FDA will require or whether the Company will be able to obtain any approvals which the FDA may deem necessary. If any of these actions are taken by the FDA, such actions could have a material adverse effect on the Company's business. In April 1996, the export provisions of the Federal Food, Drug, and Cosmetic Act were relaxed to permit the export of unapproved drugs to a foreign country, provided the product complies with the laws of that country and has valid marketing authorization in at least one of a list of designated "Tier 1" countries. Once a product is exported to a qualified foreign country, the Company will be subject to the applicable foreign regulatory requirements governing human clinical trials and marketing approval in that country. The requirements relating to the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country and there can be no assurance that the Company or any of its collaborators will be able to meet and fulfill the statutory requirements in a particular country. Health Script is subject to regulation by state regulatory authorities, principally state boards of pharmacy. In addition, Health Script is subject to regulation by other state and Federal agencies with respect to 15 reimbursement for prescription drug benefits provided to individuals covered primarily by publicly funded programs. MANUFACTURING In June 1995, the Company completed the first phase of construction of its manufacturing facility located in a Company-owned building adjacent to its headquarters. The facility initially is intended, subject to regulatory approval, to be used to formulate, mill, blend and manufacture drugs to be used with Spiros. Equipment purchases for and validation of the facility are currently scheduled through 1997. The Company's manufacturing facility must be registered with and licensed by various regulatory authorities and comply with cGMP requirements prescribed by the FDA and the State of California. The Company is currently expanding its facilities to provide additional manufacturing capabilities. The Company relies on a single manufacturer for certain of its products. Any failure or significant delay in the validation of or obtaining a satisfactory regulatory inspection of the new facility could have a material adverse effect on the Company's ability to manufacture products in connection with Spiros. The Company has limited experience manufacturing products for commercial purposes and currently does not have the capability to manufacture its pharmaceutical products and therefore is dependent on contract manufacturers for the production of such products for development and commercial purposes. The Company's current dependence upon others for the manufacture of its products may adversely affect the future profit margin, if any, on the sale of those products and the Company's ability to develop and deliver products on a timely and competitive basis. HUMAN RESOURCES The Company employed 462 employees (of which 375 are full-time) as of December 31, 1996, consisting of 244 people in sales and marketing (of which 182 constitute the field sales force), 39 in administration and finance, 69 in clinical, regulatory and research and development, 24 in operations and 86 at Health Script. None of the Company's employees are represented by a labor union and the Company believes it maintains positive relations with both field and corporate personnel. ENVIRONMENTAL COMPLIANCE The Company has not incurred any significant costs associated with environmental regulations and none are anticipated. RISKS AND UNCERTAINTIES REDUCTION IN GROSS MARGINS - There is no proprietary protection for most of the products sold by the Company and substitutes for such products are sold by other pharmaceutical companies. The Company expects average selling prices for many of its products to decline over time due to competitive and reimbursement pressures. While the Company will seek to mitigate the effect of this decline in average selling prices, there can be no assurance that the Company will be successful in these efforts. THIRD-PARTY REIMBURSEMENT; PRICING PRESSURES - The Company's commercial success will depend in part on the availability of adequate reimbursement from third-party health care payers, such as government and private health insurers and managed care organizations. Third-party payers are increasingly challenging the pricing of medical products and services. There can be no assurance that reimbursement will be available to enable the Company to achieve market acceptance of its products or to maintain price levels sufficient to realize an appropriate return on the Company's investment in product acquisition, in-licensing and development. The market for the company's products may be limited by actions of third-party payers. For example, many managed health care organizations are now controlling the pharmaceuticals that are on their formulary lists. The resulting competition among pharmaceutical companies to place their products on 16 these formulary lists has created a trend of downward pricing pressure in the industry. In addition, many managed care organizations are pursuing various ways to reduce pharmaceutical costs and are considering formulary contracts primarily with those pharmaceutical companies that can offer a full line of products for a given therapy sector or disease state. There can be no assurance that the Company's products will be included on the formulary lists of managed care organizations or that downward pricing pressure in the industry generally will not negatively impact the Company's operations. DEPENDENCE ON ACQUISITION OF RIGHTS TO PHARMACEUTICAL PRODUCTS - The Company's strategy for growth is dependent, in part, upon acquiring, in-licensing and co- promoting pharmaceuticals targeted primarily at allergists, ENTs, pulmonologists and a selected subset of pediatricians and generalist physicians. Other companies, including those with substantially greater resources, are competing with the Company for the right to such products. There can be no assurance that the Company will be able to acquire, in-license or co-promote additional pharmaceuticals on acceptable terms, if at all. The failure of the Company to acquire, in-license, co-promote, develop or market commercially successful pharmaceuticals would have a material adverse effect on the Company. Furthermore, there can be no assurance that the Company, once it has obtained rights to a pharmaceutical product and committed to payment terms, will be able to generate sales sufficient to create a profit or otherwise avoid a loss. DEVELOPMENT RISKS ASSOCIATED WITH SPIROS-TM- - Spiros will require significant additional development. There can be no assurance that development of Spiros will be completed successfully, that Spiros will not encounter problems in clinical trials that will cause the delay or suspension of such trials, that current or future testing will show Spiros to be safe or efficacious or that Spiros will receive regulatory approval. In addition, regulatory approvals will have to be obtained for each drug to be delivered through the use of Spiros prior to commercialization. Moreover, even if Spiros does receive regulatory approval, there can be no assurance that Spiros will be commercially successful, have all of the patent and other protections necessary to prevent competitors from producing similar products and not infringe on patent or other proprietary rights of third parties. The failure of Spiros to receive timely regulatory approval and achieve commercial success would have a material adverse effect on the Company. RISKS ASSOCIATED WITH RECENT ACQUISITIONS - In September 1996, the Company acquired from Lilly exclusive U.S. rights to market and distribute Keftab- Registered Trademark- and Ceclor-Registered Trademark- CD and entered into a manufacturing agreement with Lilly which terminates in certain circumstances. Any interruption in the supply of Keftab or Ceclor CD from Lilly due to regulatory or other causes could result in the inability of the Company to meet demand and could have a material adverse impact on the Company. Both Keftab and Ceclor CD are antibiotics, and the Company has limited or no experience in marketing such products. There can be no assurance that the Company will be able to successfully market and distribute Keftab or that Keftab will continue to be accepted by the market at the levels previously achieved by Lilly or at a level sufficient to maintain growth of the product. In addition, Ceclor CD has not previously been marketed to physicians, and no assurance can be given that the Company will be able to successfully compete with currently available products. Failure to successfully market and sell Keftab and Ceclor CD would have a material adverse effect on the Company's business, financial condition and results of operations. CUSTOMER CONCENTRATION; CONSOLIDATION OF DISTRIBUTION NETWORK - The distribution network for pharmaceutical products has in recent years been subject to increasing consolidation. As a result, a few large wholesale distributors control a significant share of the market and the number of independent drug stores and small chains has decreased. Further consolidation among, or any financial difficulties of, distributors or retailers could result in the combination or elimination of warehouses thereby stimulating product returns to the Company. Further consolidation or financial difficulties could also cause customers to reduce their inventory levels, or otherwise reduce purchases of the Company's products which could result in a material adverse effect on the Company's business, financial condition or results of operations. 17 Dura's customers include McKesson Drug Company, Bergen Brunswig Drug Company, Cardinal Health Inc., Bindley Western Drug Company and major drug store chains. For 1996, three wholesale customers individually accounted for 17%, 14% and 13% of sales. Two wholesale customers individually accounted for 16% and 11% of 1995 sales, three wholesale customers individually accounted for 21%, 14% and 12% of 1994 sales. The loss of any of these customer accounts could have a material adverse effect upon the Company's business, financial condition or results of operations. SEASONALITY AND FLUCTUATING QUARTERLY RESULTS - Historically, as a result of the winter cold and flu season, industry-wide demand for respiratory products has been stronger in the first and fourth quarters than during the second and third quarters of the year. In addition, variations in the timing and severity of the winter cold and flu season have influenced the Company's results of operations in the past. While the growth and productivity of the Company's sales force and the introduction by the Company of new products have historically mitigated the impact of seasonality on the Company's results of operations, recent product acquisitions by the Company are likely to increase the impact of seasonality on the Company's results of operations. No assurances can be given that the Company's results of operations will not be materially adversely affected by the seasonality of product sales. COMPETITION - Many companies, including large pharmaceutical firms with financial and marketing resources and development capabilities substantially greater than those of Dura, are engaged in developing, marketing and selling products that compete with those offered by the Company. The selling prices of such products typically decline as competition increases. Further, other products now in use or under development by others may be more effective than Dura's current or future products. The industry is characterized by rapid technological changes, and competitors may develop their products more rapidly than Dura. Competitors may also be able to complete the regulatory process sooner, and therefore, may begin to market their products in advance of Dura's products. Dura believes that competition among both prescription pharmaceuticals and pulmonary delivery systems aimed at the asthma and allergy, cough and cold markets will be based on, among other things, product efficacy, safety, reliability, availability and price. Dura directly competes with at least 25 other companies in the U.S. which are currently engaged in developing, marketing and selling respiratory pharmaceuticals. Additionally, there are at least 10 companies currently involved in the development, marketing or sales of dry powder pulmonary drug delivery systems. There are two types of dry powder inhalers ("DPIs") currently in commercial use worldwide. In the U.S., only individual dose DPIs are marketed, including the Rotohaler (developed and marketed by Glaxo Wellcome, Inc. ("Glaxo")) and the Spinhaler (developed and marketed by Fisons Limited ("Fisons")). The Turbuhaler (developed and marketed by Astra Pharmaceuticals ("Astra")), a multiple dose DPI and the leading DPI in worldwide sales, is considered the current industry standard. It is not yet marketed in the U.S., although the Food and Drug Administration ("FDA") has issued an approvable letter for the first Turbuhaler product. DEPENDENCE ON THIRD PARTIES; LIMITED MANUFACTURING EXPERIENCE - The Company's strategy for development and commercialization of certain of its products is dependent upon entering into various arrangements with corporate partners, licensors and others and upon the subsequent success of these partners, licensors and others in performing their obligations. There can be no assurance that the Company will be able to negotiate acceptable arrangements in the future or that such arrangements, or its existing arrangements will be successful. In addition, partners, licensors and others may pursue alternative technologies or develop alternative compounds or drug delivery systems either on their own or in collaboration with others, including the Company's competitors. The Company has limited experience manufacturing products for commercial purposes and currently does not have the capability to manufacture its pharmaceutical products and therefore is dependent on contract manufacturers for the production of such products for development and commercial purposes. The manufacture of the Company's products is subject to current Good Manufacturing Practice ("cGMP") regulations prescribed by the FDA. The Company relies on a single manufacturer for each of its products. In the event that the Company is unable to obtain or retain third-party manufacturing, it may not be able to commercialize its products as planned. 18 There can be no assurance that the Company will be able to continue to obtain adequate supplies of such products in a timely fashion at acceptable quality and prices. Also, there can be no assurance that the Company will be able to enter into agreements for the manufacture of future products with manufacturers whose facilities and procedures comply with cGMP and other regulatory requirements. The Company's current dependence upon others for the manufacture of its products may adversely affect future profit margins, if any, on the sale of those products and the Company's ability to develop and deliver products on a timely and competitive basis. In June 1995, the Company completed construction of its manufacturing facility located in a Company-owned building adjacent to its headquarters. The Company is currently expanding its facilities to provide additional manufacturing capabilities. The facility initially is intended to be used to formulate, mill, blend and manufacture drugs to be used with Spiros, pending regulatory approval. Equipment purchases and validation are currently scheduled through 1997. The Company's manufacturing facility must be registered with and licensed by various regulatory authorities and comply with cGMP requirements prescribed by the FDA and the State of California. Any failure or significant delay in the validation of or obtaining a satisfactory regulatory inspection of the new facility could have a material adverse effect on the Company's ability to manufacture products in connection with Spiros. MANAGING GROWTH OF BUSINESS - The Company has experienced significant growth as total revenues increased 80% in fiscal 1994, 58% in fiscal 1995 and 102% for 1996 as compared to prior years. During 1996, the Company executed agreements relating to the acquisition of the rights to the Entex, Ceclor CD and Keftab products. During fiscal 1995, the Company executed three agreements relating to the acquisition, in-licensing and co-promotion of products and acquired Health Script. Due to the Company's emphasis on acquiring and in-licensing respiratory pharmaceutical products, the Company anticipates that the integration of the recently acquired businesses and products, as well as any future acquisitions, will require significant management attention and expansion of its sales force. The Company's ability to achieve and maintain profitability is based on management's ability to manage its changing business effectively. UNCERTAINTY OF PROFITABILITY; NEED FOR ADDITIONAL FUNDS - The Company has experienced significant operating losses in the past and at December 31, 1996, the Company's accumulated deficit was $79.0 million. Although the Company has achieved profitability on a annual basis in fiscal 1994, 1995 (prior to the charge of approximately $43.8 million in the fourth quarter of 1995 in connection with the exercise of its option to purchase all of the outstanding stock of DDSI and its cash contributions to Spiros Corp.) and 1996, there can be no assurance that revenue growth or profitability will continue on a quarterly or annual basis in the future. The acquisition and in-licensing of products, the expansion of the Company's sales force in response to acquisition and in-licensing of products, the maintenance of the Company's existing sales force, the upgrade and expansion of its facilities, continued pricing pressure and the potential exercise of the Spiros Purchase Option or the Albuterol Purchase Option (as defined below), as well as funds that Dura, at its option, may provide for Spiros development, both internally and through Spiros Corp., will require the commitment of substantial capital resources and may also result in significant losses. Depending upon, among other things, the acquisition and in-licensing opportunities available, the Company may need to raise additional funds for these purposes. The Company may seek such additional funding through public and private financing, including equity financing. Adequate funds for these purposes, whether through financial markets or from other sources, may not be available when needed or on terms acceptable to the Company. Insufficient funds may require the Company to delay, scale back, or prevent some or all of its product acquisition and in-licensing programs, the upgrade and expansion of its facilities, the potential exercise of the Spiros Purchase Option and/or the Albuterol Purchase Option and further development of Spiros. The Company anticipates that its existing capital resources, together with cash expected to be generated from operations, available bank borrowings and the proceeds of this offering, should be sufficient to finance its current operations and working capital requirements through at least 1997. 19 POTENTIAL EXERCISE OF PURCHASE OPTIONS FOR SPIROS CORP. CALLABLE COMMON STOCK AND ALBUTEROL PRODUCT; DILUTION - Dura has a purchase option with respect to all of the currently outstanding shares of callable common stock of Spiros Corp.("Spiros Purchase Option"). If Dura exercises the Spiros Purchase Option, it will be required to make a substantial cash payment or to issue shares of the common stock, or both. A payment in cash would reduce Dura's capital resources. A payment in shares of common stock would result in a decrease in the percentage ownership of Dura's shareholders at that time. The exercise of the Spiros Purchase Option will likely require Dura to record a significant charge to earnings and may adversely impact future operating results. If Dura does not exercise the Spiros Purchase Option prior to its expiration, the Company's rights in and to Spiros with respect to certain compounds will terminate. Dura also has the option to provide funding for Spiros development in certain circumstances. Dura believes that the current funds of Spiros Corp. will be sufficient to fund product development by Spiros Corp. through 1997. Development of Spiros Corp. products will require significant additional funds. As part of the Company's contractual relationship with Spiros Corp., the Company received an option to purchase certain rights to an albuterol product in a cassette version of Spiros ("Albuterol Purchase Option") exercisable at any time through the earlier of 60 days after FDA approval of such albuterol product or December 31, 1999. If the Company exercises the Albuterol Purchase Option, it will be required to make a cash payment of at least $15.0 million which could have an adverse effect on its capital resources. The company may not have sufficient capital resources to exercise the Albuterol Purchase Option which may result in the Company's loss of valuable rights. In addition, continuation of development and commercialization of an albuterol product in a cassette version of Spiros may require substantial additional expenditures by Dura. Dura has not made any determination as to the likelihood of its exercise of the Spiros Purchase Option or the Albuterol Purchase Option. GOVERNMENT REGULATION; NO ASSURANCE OF FDA APPROVAL - Development, testing, manufacturing and marketing of the Company's products are subject to extensive regulation by numerous governmental authorities in the U.S. and other countries. The process of obtaining FDA approval of pharmaceutical products and drug delivery systems is costly and time-consuming. Any new pharmaceutical must undergo rigorous preclinical and clinical testing and an extensive regulatory approval process mandated by the FDA. Marketing of drug delivery systems also requires FDA approval, which can be costly and time consuming to obtain. The Company will need to obtain regulatory approval for each drug to be delivered through the use of Spiros. There can be no assurance that the pharmaceutical products currently in development, or those products acquired or in-licensed by the Company, will be approved by the FDA. In addition, there can be no assurance that all necessary clearances will be granted to the Company or its licensors for future products or that FDA review or actions will not involve delays adversely affecting the marketing and sale of the Company's products. For both currently marketed and future products, failure to comply with applicable regulatory requirements can, among other things, result in the suspension of regulatory approval, as well as possible civil and criminal sanctions. In addition, changes in regulations could have a material adverse effect on the Company. The FDA is continuing an evaluation of the effectiveness of all drug products containing ingredients marketed prior to 1962 (the year of enactment of the "Drug Amendments of 1962" to the Federal Food, Drug and Cosmetic Act) as part of its Drug Efficacy Study Implementation ("DESI") program and will determine which drugs are considered "new drugs" requiring approval through a New Drug Application ("NDA") for marketing. A policy guide issued by the FDA indicates that the FDA will implement procedures to determine whether the new drug provisions are applicable to existing products. If a final determination is made that a particular drug requires an approved NDA, such approval will be required for marketing to continue. If such a determination is made, the FDA might impose various requirements; for example, it might require that the current product be the subject of an approved NDA, that the product be reformulated and an NDA approval be obtained, that the product must be sold on an over-the-counter basis rather than as a prescription drug or that the product must be removed from the market. There can be no assurance as to which of these courses the FDA will require, if any, with respect to most of the Company's pharmaceutical products or whether the Company will be able to obtain any approvals that the FDA may deem necessary. If any of these actions are taken by the FDA, such actions could have a material adverse 20 effect on the Company's business. In addition, the Company's Tornalate Metered Dose Inhaler uses chlorofluorocarbon ("CFC") propellants. If CFCs are banned for use in the Tornalate Metered Dose Inhaler, then the Company will not be able to market that product for sale. Health Script is subject to regulation by state regulatory authorities, principally state boards of pharmacy. In addition, Health Script is subject to regulation by other state and federal agencies with respect to reimbursement for prescription drug benefits provided to individuals covered primarily by publicly-funded programs. PATENTS AND PROPRIETARY RIGHTS - The Company's success will depend in part on its ability to obtain patents on current or future products or formulations, defend its patents, maintain trade secrets and operate without infringing upon the proprietary rights of others, both in the U.S. and abroad. However, only four of the pharmaceuticals currently marketed by the Company are covered by patents. The Company also has licenses or license rights to certain other U.S. and foreign patent and patent applications. There can be no assurance that patents, U.S. or foreign, will be obtained, or that, if issued or licensed to the Company, they will be enforceable or will provide substantial protection from competition or be of commercial benefit to the Company or that the Company will possess the financial resources necessary to enforce or defend any of its patent rights. Federal court decisions establishing legal standards for determining the validity and scope of patents in the field are in transition. There can be no assurance that the historical legal standards surrounding questions of validity and scope will continue to be applied or that current defenses as to issued patents in the field will offer protection in the future. The commercial success of the Company will also depend upon avoiding the infringement of patents issued to competitors and upon maintaining the technology licenses upon which certain of the Company's current products are, or any future products under development might be, based. Litigation, which could result in substantial cost to the Company, may be necessary to enforce the Company's patent and license rights or to determine the scope and validity of proprietary rights of third parties. If any of the Company's products are found to infringe upon patents or other rights owned by third parties, the Company could be required to obtain a license to continue to manufacture or market such products. There can be no assurance that licenses to such patent rights would be made available to the Company on commercially reasonable terms, if at all. If the Company does not obtain such licenses, it could encounter delays in marketing affected products while it attempts to design around such patents or it could find that the development, manufacture or sale of products requiring such licenses is not possible. The Company currently has certain licenses from third parties and in the future may require additional licenses from other parties to develop, manufacture and market commercially viable products effectively. There can be no assurance that such licenses will be obtainable on commercially reasonable terms, if at all, or that the patents underlying such licenses will be valid and enforceable. PRODUCT LIABILITY AND RECALL - The Company faces an inherent business risk of exposure to product liability claims in the event that the use of its technologies or products is alleged to have resulted in adverse effects. Such risks will exist even with respect to those products that receive regulatory approval for commercial sale. While the Company has taken, and will continue to take, what it believes are appropriate precautions, there can be no assurance that it will avoid significant product liability exposure. The Company currently has product liability insurance; however, there can be no assurance that the level or breadth of any insurance coverage will be sufficient to fully cover potential claims. There can be no assurance that adequate insurance coverage will be available in the future at acceptable costs, if at all, or that a product liability claim or recall would not materially and adversely affect the business or financial condition of the Company. ATTRACTION AND RETENTION OF KEY PERSONNEL - The Company is highly dependent on the principal members of its management staff, the loss of whose services might impede the achievement of development objectives. Although the Company believes that it is adequately staffed in key positions and that it will be successful in retaining skilled and experienced management, operational and scientific personnel, there can be no assurance that the Company will be able to attract and retain such personnel on acceptable terms. The loss of the services of key scientific, technical and management personnel could have a material adverse effect on the Company, especially in light of the Company's recent significant growth. 21 VOLATILITY OF COMPANY STOCK PRICE - The market prices for securities of emerging companies, including the Company, have historically been highly volatile. Future announcements concerning the Company or its competitors may have a significant impact on the market price of the Company's common stock. Such announcements might include financial results, the results of testing, technological innovations, new commercial products, changes to government regulations, government decisions on commercialization of products, developments concerning proprietary rights, litigation or public concern as to safety of the Company's products. ABSENCE OF DIVIDENDS - The Company has never paid any cash dividends on its common stock. In accordance with certain bank loan agreements, the Company is restricted from paying cash dividends without prior bank approval. The Company currently anticipates that it will retain all available funds for use in its business and does not expect to pay any cash dividends in the foreseeable future. CHANGE IN CONTROL - Certain provisions of the Company's charter documents and terms relating to the acceleration of the exercisability of certain warrants and options relating to the purchase of such securities by the Company in the event of a change in control may have the effect of delaying, deferring or preventing a change in control of the Company, thereby possibly depriving shareholders of receiving a premium for their shares of the common stock. ITEM 2. PROPERTIES The Company owns and occupies two buildings that are situated on one parcel of land and has acquired land for the construction of a new corporate facility. The two buildings and the land are located in San Diego, California. One building, consisting of approximately 31,000 square feet, is used primarily as office space for research, regulatory, sales and administrative personnel. The second building, consisting of approximately 49,000 square feet, contains the Company's manufacturing facility that will be used to formulate, mill, blend and fill drugs to be used with Spiros, lab and research facilities and warehouse space. The Company also occupies an additional 34,000 square feet of office and laboratory space pursuant to a short-term lease. The Company is constructing a 70,000 square foot facility expected to be completed in the second half of 1997, to which certain corporate functions will be relocated. The Company also leases approximately 16,660 square feet of space in Denver, Colorado which houses the operations of Health Script's mail service pharmacy. The lease term expires in January 2001 with one five-year renewal option. ITEM 3. LEGAL PROCEEDINGS There are currently no material legal proceedings pending against or involving the Company. ITEM 4. SUBMISSION OF MATTERS TO THE VOTE OF SECURITY HOLDERS None. 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by Item 5 of Form 10-K is incorporated herein by reference from the information contained in the sections captioned "Market Information on Common Stock", "Shareholders", and "Dividends" in the Registrant's 1996 Annual Report to Shareholders, extracts of which are attached hereto as Exhibit 13. ITEM 6. SELECTED FINANCIAL DATA The information required by Item 6 of Form 10-K is incorporated herein by reference from the information contained in the section captioned "Selected Financial Data" in the Registrant's 1996 Annual Report to Shareholders, extracts of which are attached hereto as Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by Item 7 of Form 10-K is incorporated herein by reference from the information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1996 Annual Report to Shareholders, extracts of which are attached hereto as Exhibit 13. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Item 8 of Form 10-K is incorporated herein by reference from the information contained in the section captioned "Financial Statements and Supplementary Data" in the Registrant's 1996 Annual Report to Shareholders, extracts of which are attached hereto as Exhibit 13. 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 (a) Identification of Directors. The information under the caption "Election of Directors", appearing in the Proxy Statement to be filed on or about April 16, 1997, is incorporated herein by reference. (b) Identification of Executive Officers. The information under the caption "Executive Officers", appearing in the Proxy Statement to be filed on or about April 16, 1997, is incorporated herein by reference. (c) Compliance with Section 16 (a) of the Exchange Act. The information under the caption "Section 16 (a) Beneficial Ownership Reporting Compliance", appearing in the Proxy Statement to be filed on or about April 16, 1997, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the heading "Executive Compensation and Other Information" appearing in the Proxy Statement to be filed on or about April 16, 1997, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the headings "Principal Shareholders" and "Common Stock Ownership of Management", appearing in the Proxy Statement to be filed on or about April 16, 1997, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the headings "Election of Directors", "Executive Compensation and Other Information" and "Certain Transactions", appearing in the Proxy Statement to be filed on or about April 16, 1997, is incorporated herein by reference. 24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Independent Auditors' Report (a) 2. INDEX TO FINANCIAL STATEMENT SCHEDULES Financial statement schedules are omitted because they are not required, are not applicable or the information is included in the consolidated financial statements or notes thereto. (a) 3. EXHIBITS EXHIBIT NO. DESCRIPTION ------- ----------- 15) 3.1 Articles of Incorporation of the Company, as amended 2) 3.2 By-laws, as amended 1) 10.1 Assumption Agreement, dated December 2, 1991, between the Company and Silicon Valley Bank. 1) 10.6 Loan and Security Agreement, dated September 30, 1991, between the Company and Silicon Valley Bank. 1) 10.7 Security Agreement, dated September 30, 1991, between the Company and Silicon Valley Bank. 1) 10.8 Securities Purchase Agreement, dated August 20, 1991, between the Company and the Investors listed on Schedule A thereto, together with the related Form of Promissory Note, Form of Stock Purchase Warrant, Form of Security Agreement and Form of Registration Rights Agreement. 1) 10.19 License Agreement by and between the Company and Sterling Drug Inc. currently known as Sterling Winthrop, Inc., dated June 26, 1991 (with certain confidential portions omitted). 25 1) 10.26 License Agreement by and between the Company and Mark B. Mecikalski, M.D., dated June 1, 1990 (with certain confidential portions omitted). 1) + 10.52 Form of Employee Restricted Bonus Stock Agreement. + 10.54 Form of Indemnification Agreement between the Company and each of its directors. + 10.55 Form of Indemnification Agreement between the Company and each of its officers. 2) 10.58 Bitolterol Mesylate 0.2% Inhalation Solution and Tornalate-Registered Trademark- (Bitolterol Mesylate) Metered Dose Inhaler License Agreement by and between Sterling Winthrop, Inc. and Company, dated June 24, 1992 (with certain confidential portions omitted). 2) 10.59 Silicon Valley Bank Amendment to Loan Agreement regarding Real Estate Loan. 15) + 10.60 The Company's 1992 Stock Option Plan, as amended. 2) + 10.61 Form of Employee Non-Statutory Stock Option Agreement. 2) + 10.62 Form of Employee Incentive Stock Option Agreement. 2) + 10.63 Form of Officer Incentive Stock Option Agreement. 2) + 10.64 Form of Automatic Grant Non-Employee Director Agreements. 2) + 10.65 Employment Agreement - Cam L. Garner dated May 7, 1990. 4) 10.72 Form of Series W Warrant. 5) 10.73 Assignment Agreement by and between the Company and Mark B. Mecikalski, M.D., dated March 12, 1993 (with certain confidential portions omitted). 6) 10.80 Registration Rights Agreement by and between the Company and Elan International Services Limited, as successor in interest, dated April 17, 1994. 10.81 Letter Agreements between the Company and Elan International Services Limited, dated March 1, 1995 and September 3, 1996. 10.82 Form of Common Stock Purchase Warrant between the Company and Elan International Services Ltd. 7) 10.83 Product Licensing Agreement among Elan Corporation, plc, Dura Delivery Systems, Inc. and the Company (with certain confidential portions omitted). 26 7) 10.84 Protein and Peptide Development Agreement between Elan Corporation, plc and the Company (with certain confidential portions omitted). 7) 10.85 Technology Access Agreement between Elan Corporation, plc and the Company (with certain confidential portions omitted). 8) 10.86 Silicon Valley Bank Amendment to Loan Agreement regarding Real Estate Loan dated November 10, 1994. 9) 10.87 Business Combination Agreement dated March 15, 1995 between Quintex, Ltd., Health Script Pharmacy Services, Inc. and the Company (including Schedules B, C, D and E). 10) 10.88 Purchase Agreement dated June 14, 1995 between the Company and Abbott Laboratories, Ross Products Division, including list of Schedules and Exhibits thereto (with certain confidential portions omitted). 11) 10.89 Restated Certificate of Incorporation of DDSI. 11) 10.90 Agreement and Plan of Merger dated December 29, 1995 among the Company, DDSI and Safari Acquisition Corporation. 11) 10.91 Purchase Agreement by and among the Company, Spiros Corp. and the entities listed on the Schedule of Purchasers. 11) 10.92 Investors' Rights Agreement by and among the Company and the investors listed on Schedule A thereto, dated December 29, 1995. 11) 10.93 Stockholders' Agreement by and among Spiros Corp., the Company and the persons listed on Schedule A thereto, dated December 29, 1995. 11) 10.94 Form of Series S Warrant. 11) 10.95 Technology License Agreement by and among the Company, DDSI and Spiros Corp., dated December 29, 1995. 11) 10.96 Development and Management Agreement by and between the Company and Spiros Corp., dated December 29, 1995 (with certain confidential portions omitted). 11) 10.97 Interim Manufacturing and Marketing Agreement by and between the Company and Spiros Corp., dated December 29, 1995. 11) 10.98 Albuterol Purchase Option Agreement by and between the Company and Spiros Corp., dated December 29, 1995. 11) 10.99 Restated Certificate of Incorporation of Spiros Corp. 13) 10.100 Agreement for Purchase and Sale of Assets, dated June 17, 1996 between the Company and Procter & Gamble Pharmaceuticals, Inc. (with certain confidential portions omitted). 14) 10.101 Licensing Agreement dated August 21, 1996 between the Company and Eli Lilly and Company (with certain confidential portions omitted). 10.102 Manufacturing Agreement dated August 21, 1996 between the Company and Eli Lilly and Company (with certain confidential portions omitted). 11 Statements Re Computations of Net Income (Loss) Per Share. 13 1996 Annual Report to Shareholders (Only items incorporated by reference) 23 Independent Auditors' Consent. 24 Power of Attorney. 27 27 Financial Data Schedule. 1) Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 33-44525), filed on December 13, 1991, as amended. 2) Incorporated by reference to the Company's Form 10-K, filed on March 31, 1993, as amended. 3) Incorporated by reference to the Company's Form 8-K, filed on September 15, 1993. 4) Incorporated by reference to the Company's Registration Statement on Form S-3 (No. 33-71798), filed on December 13, 1993. 5) Incorporated by reference to the Company's Form 10-K, filed on March 31, 1994, as amended. 6) Incorporated by reference to the Company's Form 10-Q, filed on August 5, 1994. 7) Incorporated by reference to the Company's Form 10-Q, filed on October 17, 1994, as amended. 8) Incorporated by reference to the Company's Form 10-K, filed on March 31, 1995. 9) Incorporated by reference to the Company's Form 8-K, filed on April 6, 1995. 10) Incorporated by reference to the Company's Form 8-K, filed on June 20, 1995, as amended. 11) Incorporated by reference to the Company's Form 8-K, filed on January 9, 1996, as amended. 13) Incorporated by reference to the Company's Form 8-K, filed on July 17, 1996. 14) Incorporated by reference to the Company's Form 8-K, filed on September 19, 1996, as amended. 15) Incorporated by reference to the Company's Form 10-Q, filed on August 14, 1996. + Management contract or compensation plan or arrangement. (b) REPORTS ON FORM 8-K. On December 20, 1996, the Company filed a Current Report on Form 8-K/A dated September 5, 1996 (which amended the Current Report of the Company on Form 8-K filed on September 19, 1996) transmitting a revised Exhibit 2.1, with certain confidential portions omitted. SUPPLEMENTAL INFORMATION No Annual Report to Shareholders or Proxy materials have been sent to shareholders as of the date of this report. The Annual Report to Shareholders and Proxy material will be furnished to the Company's shareholders subsequent to the filing of this report and the Company will furnish such material to the Securities and Exchange Commission at that time. 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 Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 28, 1997 DURA PHARMACEUTICALS, INC. --------------------------- By: /s/ Cam L. Garner ------------------------------- Cam L. Garner, Chairman, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Cam L. Garner and James W. Newman, or either of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS ANNUAL REPORT ON FORM 10-K 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/ Cam L. Garner Chairman, President and March 28, 1997 - --------------------- Chief Executive Officer (Cam L. Garner) (Principal Executive Officer) /s/ David S. Kabakoff Executive Vice President March 28, 1997 - --------------------- and Director (David S. Kabakoff) /s/ James W. Newman Senior Vice President, Finance and March 28, 1997 - --------------------- Administration, and Chief (James W. Newman) Financial Officer (Principal Financial and Accounting Officer) /s/ Walter F. Spath Senior Vice President, March 28, 1997 - --------------------- Sales and Marketing and Director (Walter F. Spath) /s/ James C. Blair Director March 28, 1997 - --------------------- (James C. Blair) /s/ Herbert J. Conrad Director March 28, 1997 - --------------------- (Herbert J. Conrad) /s/ Joseph C. Cook Director March 28, 1997 - --------------------- (Joseph C. Cook) /s/ David F. Hale Director March 28, 1997 - --------------------- (David F. Hale) /s/ Gordon V. Ramseier Director March 28, 1997 - --------------------- (Gordon V. Ramseier) /s/ Charles G. Smith Director March 28, 1997 - --------------------- (Charles G. Smith) 29 EXHIBIT INDEX TO FORM 10-K DURA PHARMACEUTICALS, INC. EXHIBIT NO. DESCRIPTION ------- ----------- 15) 3.1 Articles of Incorporation of the Company, as amended 2) 3.2 By-laws, as amended 1) 10.1 Assumption Agreement, dated December 2, 1991, between the Company and Silicon Valley Bank. 1) 10.6 Loan and Security Agreement, dated September 30, 1991, between the Company and Silicon Valley Bank. 1) 10.7 Security Agreement, dated September 30, 1991, between the Company and Silicon Valley Bank. 1) 10.8 Securities Purchase Agreement, dated August 20, 1991, between the Company and the Investors listed on Schedule A thereto, together with the related Form of Promissory Note, Form of Stock Purchase Warrant, Form of Security Agreement and Form of Registration Rights Agreement. 1) 10.19 License Agreement by and between the Company and Sterling Drug Inc. currently known as Sterling Winthrop, Inc., dated June 26, 1991 (with certain confidential portions omitted). 1) 10.26 License Agreement by and between the Company and Mark B. Mecikalski, M.D., dated June 1, 1990 (with certain confidential portions omitted). 1) + 10.52 Form of Employee Restricted Bonus Stock Agreement. + 10.54 Form of Indemnification Agreement between the Company and each of its directors. + 10.55 Form of Indemnification Agreement between the Company and each of its officers. 2) 10.58 Bitolterol Mesylate 0.2% Inhalation Solution and Tornalate-Registered Trademark- (Bitolterol Mesylate) Metered Dose Inhaler License Agreement by and between Sterling Winthrop, Inc. and Company, dated June 24, 1992 (with certain confidential portions omitted). 2) 10.59 Silicon Valley Bank Amendment to Loan Agreement regarding Real Estate Loan. 15) + 10.60 The Company's 1992 Stock Option Plan, as amended. 2) + 10.61 Form of Employee Non-Statutory Stock Option Agreement. 2) + 10.62 Form of Employee Incentive Stock Option Agreement. 2) + 10.63 Form of Officer Incentive Stock Option Agreement. 2) + 10.64 Form of Automatic Grant Non-Employee Director Agreements. 2) + 10.65 Employment Agreement - Cam L. Garner dated May 7, 1990. 4) 10.72 Form of Series W Warrant. 5) 10.73 Assignment Agreement by and between the Company and Mark B. Mecikalski, M.D., dated March 12, 1993 (with certain confidential portions omitted). 6) 10.80 Registration Rights Agreement by and between the Company and Elan International Services Limited, as successor in interest, dated April 17, 1994. 10.81 Letter Agreements between the Company and Elan International Services Limited, dated March 1, 1995 and September 3, 1996. 10.82 Form of Common Stock Purchase Warrant between the Company and Elan International Services Ltd. 7) 10.83 Product Licensing Agreement among Elan Corporation, plc, Dura Delivery Systems, Inc. and the Company (with certain confidential portions omitted). 7) 10.84 Protein and Peptide Development Agreement between Elan Corporation, plc and the Company (with certain confidential portions omitted). 7) 10.85 Technology Access Agreement between Elan Corporation, plc and the Company (with certain confidential portions omitted). 8) 10.86 Silicon Valley Bank Amendment to Loan Agreement regarding Real Estate Loan dated November 10, 1994. 9) 10.87 Business Combination Agreement dated March 15, 1995 between Quintex, Ltd., Health Script Pharmacy Services, Inc. and the Company (including Schedules B, C, D and E). 10) 10.88 Purchase Agreement dated June 14, 1995 between the Company and Abbott Laboratories, Ross Products Division, including list of Schedules and Exhibits thereto (with certain confidential portions omitted). 11) 10.89 Restated Certificate of Incorporation of DDSI. 11) 10.90 Agreement and Plan of Merger dated December 29, 1995 among the Company, DDSI and Safari Acquisition Corporation. 11) 10.91 Purchase Agreement by and among the Company, Spiros Corp. and the entities listed on the Schedule of Purchasers. 11) 10.92 Investors' Rights Agreement by and among the Company and the investors listed on Schedule A thereto, dated December 29, 1995. 11) 10.93 Stockholders' Agreement by and among Spiros Corp., the Company and the persons listed on Schedule A thereto, dated December 29, 1995. 11) 10.94 Form of Series S Warrant. 11) 10.95 Technology License Agreement by and among the Company, DDSI and Spiros Corp., dated December 29, 1995. 11) 10.96 Development and Management Agreement by and between the Company and Spiros Corp., dated December 29, 1995 (with certain confidential portions omitted). 11) 10.97 Interim Manufacturing and Marketing Agreement by and between the Company and Spiros Corp., dated December 29, 1995. 11) 10.98 Albuterol Purchase Option Agreement by and between the Company and Spiros Corp., dated December 29, 1995. 11) 10.99 Restated Certificate of Incorporation of Spiros Corp. 13) 10.100 Agreement for Purchase and Sale of Assets, dated June 17, 1996 between the Company and Procter & Gamble Pharmaceuticals, Inc. (with certain confidential portions omitted). 14) 10.101 Licensing Agreement dated August 21, 1996 between the Company and Eli Lilly and Company (with certain confidential portions omitted). 10.102 Manufacturing Agreement dated August 21, 1996 between the Company and Eli Lilly and Company (with certain confidential portions omitted). 11 Statements Re Computations of Net Income (Loss) Per Share. 13 1996 Annual Report to Shareholders (Only items incorporated by reference) 23 Independent Auditors' Consent. 24 Power of Attorney. 27 Financial Data Schedule. 1) Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 33-44525), filed on December 13, 1991, as amended. 2) Incorporated by reference to the Company's Form 10-K, filed on March 31, 1993, as amended. 3) Incorporated by reference to the Company's Form 8-K, filed on September 15, 1993. 4) Incorporated by reference to the Company's Registration Statement on Form S-3 (No. 33-71798), filed on December 13, 1993. 5) Incorporated by reference to the Company's Form 10-K, filed on March 31, 1994, as amended. 6) Incorporated by reference to the Company's Form 10-Q, filed on August 5, 1994. 7) Incorporated by reference to the Company's Form 10-Q, filed on October 17, 1994, as amended. 8) Incorporated by reference to the Company's Form 10-K, filed on March 31, 1995. 9) Incorporated by reference to the Company's Form 8-K, filed on April 6, 1995. 10) Incorporated by reference to the Company's Form 8-K, filed on June 20, 1995, as amended. 11) Incorporated by reference to the Company's Form 8-K, filed on January 9, 1996, as amended. 13) Incorporated by reference to the Company's Form 8-K, filed on July 17, 1996. 14) Incorporated by reference to the Company's Form 8-K, filed on September 19, 1996, as amended. 15) Incorporated by reference to the Company's Form 10-Q, filed on August 14, 1996. EX-10.54 2 EXHIBIT 10.54 EXHIBIT 10.54 INDEMNIFICATION AGREEMENT (Directors) THIS AGREEMENT is made and entered into this _____ day of December, 1996, between Dura Pharmaceuticals, Inc., a California corporation ("Corporation"), whose address is 5880 Pacific Center Blvd., San Diego, California 92121, and ____________________ ("Director"), whose address is _________________________. RECITALS WHEREAS, Director, a member of the Board of Directors of Corporation, performs a valuable service in such capacity for Corporation; and WHEREAS, the Articles of Incorporation of Corporation authorize and permit contracts between Corporation and the members of its Board of Directors with respect to indemnification of such directors; and WHEREAS, by its terms the California General Corporation Law, as amended and in effect from time to time or any successor or other statutes of California having similar import and effect (the "Code" or "California Law"), currently purports to be the controlling law governing Corporation with respect to certain aspects of corporate law, including indemnification of directors and officers; and WHEREAS, in accordance with the authorization provided by California Law, Corporation may purchase and maintain a policy or policies of Directors and Officers Liability Insurance ("D & 0 Insurance"), covering certain liabilities which may be incurred by its directors and officers in the performance of services as directors and officers of Corporation; and WHEREAS, as a result of recent developments affecting the terms, scope and availability of D & 0 insurance there exists general uncertainty as to the extent and overall desirability of protection afforded members of the Board of Directors by such D & 0 Insurance, if any, and by statutory and bylaw indemnification provisions; and WHEREAS, in order to induce Director to continue to serve as a member of the Board of Directors of Corporation, Corporation has determined and agreed to enter into this contract with Director; AGREEMENT NOW, THEREFORE, in consideration of Director's continued service as a director after the date hereof, the parties hereto agree as follows: 1. CERTAIN DEFINITIONS. The following terms used in this Agreement shall have the meanings set forth below. Other terms are defined where appropriate in this Agreement. (a) "Disinterested Director" shall mean a director of Corporation who is not or was not a party to the Proceeding in respect of which indemnification is being sought by Director. (b) "Expenses" shall include all direct and indirect costs (including, without limitation, attorneys' fees, retainers, court costs, transcripts, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, all other disbursements or out-of-pocket expenses and reasonable compensation for time spent by Director for which he or she is otherwise not compensated by Corporation) actually and reasonably incurred in connection with a Proceeding or establishing or enforcing a right to indemnification under this Agreement, applicable law or otherwise; provided, however, that "Expenses" shall not include any Liabilities. (c) "Final Adverse Determination" shall mean that a determination that Director is not entitled to indemnification shall have been made pursuant to Section 5 hereof and either (i) a final adjudication in a California court or decision of an arbitrator pursuant to Section 13(a) hereof shall have denied Director's right to indemnification hereunder, or (ii) Director shall have failed to file a complaint in a California court or seek an arbitrator's award pursuant to Section 13(a) for a period of one hundred twenty (120) days after the determination made pursuant to Section 5 hereof. (d) "Independent Legal Counsel" shall mean a law firm or member of a law firm selected by Corporation and approved by Director (which approval shall not be unreasonably withheld) and that neither is presently nor in the past five years has been retained to represent: (i) Corporation, in any material matter, or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Legal Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either Corporation or Director in an action to determine Director's right to indemnification under this Agreement. (e) "Liabilities" shall mean liabilities of any type whatsoever including, but not limited to, any judgments, fines, ERISA excise taxes and penalties, penalties and amounts paid in settlement (including all interest assessments and other charges paid or payable in connection with or in respect of such judgments, fines, penalties or amounts paid in settlement) of any proceeding. (f) "Proceeding" shall mean any threatened, pending or completed action, claim, suit, arbitration, alternative dispute resolution mechanism, investigation, administrative hearing or any other proceeding whether civil, criminal, administrative or investigative, including any appeal therefrom. (g) "Change of Control" shall mean the occurrence of any of the following events after the date of this Agreement: 2 (i) A change in the composition of the Board of Directors of Corporation (the "Board"), as a result of which fewer than two-thirds (2/3) of the incumbent directors are directors who either (1) had been directors of Corporation twenty-four (24) months prior to such change or (2) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of Corporation 24 months prior to such change and who were still in office at the time of the election or nomination; or (ii) Any "person" (as such term is used in section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) through the acquisition or aggregation of securities is or becomes the beneficial owner, directly or indirectly, of securities of Corporation representing twenty percent (20%) or more of the combined voting power of Corporation's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the "Capital Stock"), except that any change in ownership of Corporation's securities by any person resulting solely from a reduction in the aggregate number of outstanding shares of Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of Corporation. 2. INDEMNITY OF DIRECTOR. Corporation hereby agrees to hold harmless and indemnify Director to the fullest extent authorized by the provisions of the Code. 3. ADDITIONAL INDEMNITY. Subject only to the limitations set forth in Section 4 hereof, Corporation hereby further agrees to hold harmless and indemnify Director: (a) against any and all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by Director in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including an action by or in the right of Corporation) to which Director is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Director is, was or at any time becomes a director, officer, employee or agent of Corporation, or is or was serving or at any time serves at the request of Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise; and (b) otherwise to the fullest extent as may be provided to Director by Corporation under the indemnification non-exclusivity provision of the Articles of Incorporation of Corporation and the Code. 4. LIMITATIONS ON ADDITIONAL INDEMNITY. (a) No indemnity pursuant to Section 3 hereof shall be paid by Corporation for any of the following: 3 (i) except to the extent the aggregate of losses to be indemnified thereunder exceeds the sum of such losses for which Director is indemnified pursuant to Section 2 hereof or reimbursed pursuant to any D & 0 Insurance purchased and maintained by Corporation; (ii) in respect to remuneration paid to Director if it shall be determined by a final judgment or other final adjudication that such remuneration was in violation of law; (iii) on account of any suit in which judgment is rendered against Director for an accounting of profits made from the purchase or sale by Director of securities of Corporation pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; (iv) on account of Director's acts or omissions that involve intentional misconduct or a knowing and culpable violation of law if such acts or omission have been established by a judgment or other final adjudication adverse to Director (an "Adverse Judgment"); (v) provided there has been no Change of Control, on account of or arising in response to any action, suit or proceeding (other than an action, suit or proceeding referred to in Section 14(b) hereof) initiated by Director or any of Director's affiliates against Corporation or against any officer, director or shareholder of Corporation unless such proceeding was authorized by the Board of Directors of Corporation; (vi) if a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful; or (vii) on account of any action, suit or proceeding to the extent that Director is a plaintiff, a counter-complainant or a cross-complainant therein (other than an action, suit or proceeding permitted by Section 4(a)(v) hereof). (b) In addition to those limitations set forth above in paragraph (a) of this Section 4, no indemnity pursuant to Section 3 hereof in an action by or in the right of Corporation shall be paid by Corporation for any of the following: (i) on account of acts or omissions that Director believes to be contrary to the best interests of Corporation or its shareholders or that involve the absence of good faith on the part of Director, if so established by an Adverse Judgment; (ii) with respect to any transaction from which Director derived an improper personal benefit, if so established by an Adverse Judgment; (iii)on account of acts or omissions that show a reckless disregard for Director's duty to Corporation or its shareholders in circumstances in which Director was aware, 4 or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to Corporation or its shareholders, if so established by an Adverse Judgment; (iv) on account of acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of Director's duty to Corporation or its shareholders, if so established by an Adverse Judgment; (v) on account of proceedings under Section 310 of California Law (contracts in which director has material financial interest), if so established by an Adverse Judgment; (vi) on account of proceedings under Section 316 of California Law (corporation actions subjecting directors to joint and several liability), if so established by an Adverse Judgment; (vii) in respect of any claim, issue or matter as to which Director shall have been adjudged to be liable to Corporation in the performance of Director's duty to Corporation and its shareholders, unless and only to the extent that the court in which such proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Director is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine; (viii) of amounts paid in settling or otherwise disposing of a pending action without court approval; and (ix) of expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval. 5. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. (a) Whenever Director believes that he or she is entitled to indemnification pursuant to this Agreement, Director shall submit a written request for indemnification to Corporation. Any request for indemnification shall include sufficient documentation or information reasonably available to Director to support his or her claim for indemnification. Director shall submit his or her claim for indemnification within a reasonable time not to exceed five years after any judgment, order, settlement, dismissal, arbitration award, conviction, acceptance of a plea of nolo contendere or its equivalent, final termination or other disposition or partial disposition of any Proceeding, whichever is the later date for which Director requests indemnification. The President or the Secretary or other appropriate officer shall, promptly upon receipt of Director's request for indemnification, advise the Board of Directors in writing that Director has made such a request. Determination of Director's entitlement to indemnification shall be made not later than ninety (90) days after Corporation's receipt of his or her written request for such indemnification. 5 (b) The Director shall be entitled to select the forum in which Director's request for indemnification will be heard, which selection shall be included in the written request for indemnification required in Section 5(a). This forum shall be any one of the following: (i) The stockholders of Corporation; (ii) A quorum of the Board of Directors consisting of Disinterested Directors; (iii)Independent Legal Counsel, who shall make the determination in a written opinion; or (iv) A panel of three arbitrators, one selected by Corporation, another by Director and the third by the first two arbitrators selected. If for any reason three arbitrators are not selected within thirty (30) days after the appointment of the first arbitrator, then selection of additional arbitrators shall be made by the American Arbitration Association. If any arbitrator resigns or is unable to serve in such capacity for any reason, the American Arbitration Association shall select his or her replacement. The arbitration shall be conducted pursuant to the commercial arbitration rules of the American Arbitration Association now in effect. If Director fails to make such designation, his or her claim shall be determined by the forum selected by Corporation. 6. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS. Upon making a request for indemnification, Director shall be presumed to be entitled to indemnification under this Agreement and Corporation shall have the burden of proof to overcome that presumption in reaching any contrary determination. The termination of any Proceeding by judgment, order, settlement, arbitration award or conviction, or upon a plea of nolo contendere or its equivalent shall not affect this presumption or, except as may be provided in Section 4 hereof, establish a presumption with regard to any factual matter relevant to determining Director's rights to indemnification hereunder. If the person or persons so empowered to make a determination pursuant to Section 5(b) hereof shall have failed to make the requested determination within thirty (30) days after any judgment, order, settlement, dismissal, arbitration award, conviction, acceptance of a plea of nolo contendere or its equivalent, or other disposition or partial disposition of any Proceeding or any other event which could enable Corporation to determine Director's entitlement to indemnification, the requisite determination that Director is entitled to indemnification shall be deemed to have been made. 7. CONTRIBUTION. If the indemnification provided in Sections 2 and 3 is unavailable and may not be paid to Director for any reason other than those set forth in Section 4 (excluding subsections 4(b) (viii) and (ix)), then in respect of any threatened, pending or completed action, suit or proceeding in which Corporation is or is alleged to be jointly liable with Director (or would be if joined in such action, suit or proceeding), Corporation shall contribute to the amount of expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Director in such proportion as is appropriate to reflect (i) the relative benefits received by Corporation on the one hand and Director on the other 6 hand from the transaction from which such action, suit or proceeding arose, and (ii) to relative fault of Corporation on the one hand and of Director on the other in connection with the events which resulted in such expenses, judgments, fines or settlement amounts, as well as any other relevant equitable considerations. The relative fault of Corporation on the one hand and of Director on the other shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such expenses, judgments, fines or settlement amounts. Corporation agrees that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations. 8. INSURANCE AND FUNDING. Corporation hereby represents and warrants that it shall purchase and maintain insurance to protect itself and/or Director against any Expenses and Liabilities in connection with any Proceeding to the fullest extent permitted by California Law. In the event of a Change of Control, Corporation shall establish a letter of credit, as provided in Section 9, to ensure the payment of such amounts as may be necessary to effect indemnification or advancement of Expenses as provided in this Agreement. 9. LETTER OF CREDIT. (a) In order to secure the obligations of Corporation to indemnify and advance Expenses to Director pursuant to this Agreement, Corporation shall obtain at the time of any Change of Control, upon request of any director, an irrevocable standby letter of credit naming the directors of the Corporation in office at the time of a Change of Control as joint beneficiaries (the "Letter of Credit"). The Letter of Credit shall be in an appropriate amount not less than two million dollars ($2,000,000), shall be issued by a commercial bank headquartered in the United States having assets in excess of $10 billion and capital according to its most recent published reports equal to or greater than the then applicable minimum capital standards promulgated by such bank's primary federal regulator and shall contain terms and conditions reasonably acceptable to all directors. The Letter of Credit shall provide that Director may from time to time draw certain amounts thereunder, upon written certification by Director to the issuer of the Letter of Credit that (i) Director has made written request upon Corporation for an amount not less than the amount he or she is drawing under the Letter of Credit and that Corporation has failed or refused to provide him with such amount in full within thirty (30) days after receipt of the request, and (ii) Director believes that he or she is entitled under the terms of this Agreement to the amount which he or she is drawing upon under the Letter of Credit. The issuance of the Letter of Credit shall not, in any way, diminish Corporation's obligation to indemnify Director against Expenses and Liabilities to the full extent required by this Agreement. (b) Once Corporation has obtained the Letter of Credit, Corporation shall maintain and renew the Letter of Credit or substitute letter of credit meeting the criteria of Section 9(a) during the term of this Agreement so that the Letter of Credit shall have an initial term of five years, be renewed for successive five-year terms, and always have at least one year of its term remaining. 7 10. CONTINUATION OF OBLIGATIONS. All agreements and obligations of Corporation contained herein shall continue during the period Director is a director, officer, employee or agent of Corporation (or is or was serving at the request of Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and shall continue thereafter so long as Director shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal or investigative, by reason of the fact that Director was serving Corporation or any such other entity in any capacity referred to herein. 11. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by Director of notice of the commencement of any action, suit or proceeding, Director will, if a claim in respect thereof is to be made against Corporation under this Agreement, notify Corporation of the commencement thereof; but the omission so to notify Corporation will not relieve it from any liability which it may have to Director otherwise, than under this Agreement. With respect to any such action, suit or proceeding as to which Director notifies Corporation of the commencement thereof: (a) Corporation will be entitled to participate therein at its own expense; (b) Except as otherwise provided below, to the extent that it may wish, Corporation jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel satisfactory to Director. After notice from Corporation to Director of its election so as to assume the defense thereof, Corporation will not be liable to Director under this Agreement for any legal or other expenses subsequently incurred by Director in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Director shall have the right to employ its counsel in such action, suit or proceeding, but the fees and expenses of such counsel incurred after notice from Corporation of its assumption of the defense thereof shall be at the expense of Director unless (i) the employment of counsel by Director has been authorized by Corporation, (ii) Director shall have reasonably concluded that there may be a conflict of interest between Corporation and Director in the conduct of the defense of such action or (iii) Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel shall be at the expense of Corporation. Corporation shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of Corporation or as to which Director shall have made the conclusion provided for in (ii) above; and (c) Provided there has been no Change of Control, Corporation shall not be liable to indemnify Director under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent, which consent shall not be unreasonably withheld. Corporation shall not settle any action or claim in any manner which would impose any penalty or limitation on Director without Director's written consent. 12. ADVANCEMENT AND REPAYMENT OF EXPENSES. (a) In the event that Director employs his or her own counsel pursuant to Section 11(b)(i) through (iii) above, Corporation shall advance to Director, prior to any final 8 disposition of any threatened or pending action, suit or proceeding, whether civil, criminal, administrative or investigative, any and all reasonable expenses (including legal fees and 9 expenses) incurred in investigating or defending any such action, suit or proceeding within ten (10) days after receiving copies of invoices presented to Director for such expenses; (b) Director agrees that Director will reimburse Corporation for all reasonable expenses paid by Corporation in defending any civil or criminal action, suit or proceeding against Director in the event and only to the extent it shall be ultimately determined by a final judicial decision (from which there is no right of appeal) that Director is not entitled, under applicable law, the Bylaws, this Agreement and otherwise, to be indemnified by Corporation for such expenses. 13. REMEDIES OF DIRECTOR. (a) In the event that (i) a determination pursuant to Section 5 hereof is made that Director is not entitled to indemnification, (ii) advances of Expenses are not made pursuant to this Agreement, (iii) payment has not been timely made following a determination of entitlement to indemnification pursuant to this Agreement, or (iv) Director otherwise seeks enforcement of this Agreement, Director shall be entitled to a final adjudication in an appropriate court of the State of California of his or her rights. Alternatively, Director at his or her option may seek an award in arbitration to be conducted by a single arbitrator pursuant to the commercial arbitration rules of the American Arbitration Association now in effect, whose decision is to be made within ninety (90) days following the filing of the demand for arbitration. The Corporation shall not oppose Director's right to seek any such adjudication or arbitration award. (b) In the event that a determination that Director is not entitled to indemnification, in whole or in part, has been made pursuant to Section 5 hereof, the decision in the judicial proceeding or arbitration provided in paragraph (a) of this Section 13 shall be made de novo and Director shall not be prejudiced by reason of a determination that he or she is not entitled to indemnification. (c) If a determination that Director is entitled to indemnification has been made pursuant to Section 5 hereof or otherwise pursuant to the terms of this Agreement, Corporation shall be bound by such determination in the absence of (i) a misrepresentation of a material fact by Director or (ii) a specific finding (which has become final) by an appropriate court of the State of California that all or any part of such indemnification is expressly prohibited by law. (d) In any court proceeding pursuant to this Section 13, Corporation shall be precluded from asserting that the procedures and presumptions of this Agreement are not valid, binding and enforceable. The Corporation shall stipulate in any such court or before any such arbitrator that Corporation is bound by all the provisions of this Agreement and is precluded from making any assertion to the contrary. (e) Expenses reasonably incurred by Director in connection with his or her request for indemnification under this Agreement, meeting enforcement of this Agreement or to recover damages for breach of this Agreement shall be borne by Corporation. 10 (f) Corporation and Director agree herein that a monetary remedy for breach of this Agreement, at some later date, will be inadequate, impracticable and difficult of proof, and further agree that such breach would cause Director irreparable harm. Accordingly, Corporation and Director agree that Director shall be entitled to temporary and permanent injunctive relief to enforce this Agreement without the necessity of proving actual damages or irreparable harm. The Corporation and Director further agree that Director shall be entitled to such injunctive relief, including temporary restraining orders, preliminary injunctions and permanent injunctions, without the necessity of posting bond or other undertaking in connection therewith. Any such requirement of bond or undertaking is hereby waived by Corporation, and Corporation acknowledges that in the absence of such a waiver, a bond or undertaking may be required by the court. 14. ENFORCEMENT. (a) Corporation expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on Corporation hereby in order to induce Director to continue as a director of Corporation, and acknowledges that Director is relying upon this Agreement in continuing in such capacity. (b) In the event Director is required to bring any action to enforce rights or to collect moneys due under this Agreement and is successful in such action, Corporation shall reimburse Director for all of Director's reasonable attorneys' fees and expenses in bringing and pursuing such action. 15. SEPARABILITY. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision hereof shall be held to be invalid or unenforceable to any extent for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof, and the affected provision shall be construed and enforced so as to effectuate the parties' intent to the maximum extent possible. 16. GOVERNING LAW. This Agreement shall be governed by and interpreted and enforced in accordance with the laws of the State of California. 17. CONSENT TO JURISDICTION. The Corporation and Director each irrevocably consent to jurisdiction of the courts of the State of California for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of California. 18. BINDING EFFECT. This Agreement shall be binding upon Director and upon Corporation, its successors and assigns, and shall inure to the benefit of Director, his or her heirs, personal representatives and assigns and to the benefit of Corporation, its successors and assigns. 11 19. ENTIRE AGREEMENT. This Agreement represents the entire agreement between the parties hereto and there are no other agreements, contracts or understandings between the parties hereto with respect to the subject matter of this Agreement, except as specifically referred to herein. This Agreement supersedes any and all agreements regarding indemnification heretofore entered into by the parties. 20. AMENDMENT AND TERMINATION. No amendment, modification, waiver, termination or cancellation of this Agreement shall be effective for any purpose unless set forth in writing signed by both parties hereto. 21. SUBROGATION. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Director, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable Corporation effectively to bring suit to enforce such rights. 22. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Director by this Agreement shall not be exclusive of any other right which Director may have or hereafter acquire under any statute, provision of Corporation's Articles of Incorporation or Bylaws, agreement vote of shareholders or directors, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding office. 23. SURVIVAL OF RIGHTS. The rights conferred on Director by this Agreement shall continue after Director has ceased to be a director, officer, employee or other agent of Corporation and shall inure to the benefit of Director's heirs, executors and administrators. 24. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be addressed to Director or to Corporation, as the case may be, at the address shown on page 1 of this Agreement, or to such other address as may have been furnished by either party to the other, and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed. 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. DIRECTOR: CORPORATION: DURA PHARMACEUTICALS, INC. By: - ------------------------------- ---------------------------------------- (Signature) (Signature) Cam L. Garner, Chairman, President & CEO - ------------------------------- ---------------------------------------- Printed Name Printed Name and Title 13 EX-10.55 3 INDEMNIFICATION AGREEMENT EXHIBIT 10.55 INDEMNIFICATION AGREEMENT (Officers) THIS AGREEMENT is made and entered into this _____ day of December, 1996, between Dura Pharmaceuticals, Inc., a California corporation ("Corporation"), whose address is 5880 Pacific Center Blvd., San Diego, California 92121, and ____________________ ("Officer"), whose address is _________________________. RECITALS WHEREAS, Officer is ___________________________ of Corporation and performs a valuable service in such capacity for Corporation; and WHEREAS, the Articles of Incorporation of Corporation authorize and permit contracts between Corporation and its officers with respect to indemnification of such officers; and WHEREAS, by its terms the California General Corporation Law, as amended and in effect from time to time or any successor or other statutes of California having similar import and effect (the "Code" or "California Law"), currently purports to be the controlling law governing Corporation with respect to certain aspects of corporate law, including indemnification of directors and officers; and WHEREAS, in accordance with the authorization provided by California Law, Corporation may purchase and maintain a policy or policies of Directors and Officers Liability Insurance ("D & 0 Insurance"), covering certain liabilities which may be incurred by its directors and officers in the performance of services as directors and officers of Corporation; and WHEREAS, as a result of recent developments affecting the terms, scope and availability of D & 0 insurance there exists general uncertainty as to the extent and overall desirability of protection afforded its officers by such D & 0 Insurance, if any, and by statutory and bylaw indemnification provisions; and WHEREAS, in order to induce Officer to continue to serve in such capacity for Corporation, Corporation has determined and agreed to enter into this contract with Officer; AGREEMENT NOW, THEREFORE, in consideration of Officer's continued service as an officer after the date hereof, the parties hereto agree as follows: 1. CERTAIN DEFINITIONS. The following terms used in this Agreement shall have the meanings set forth below. Other terms are defined where appropriate in this Agreement. (a) "Disinterested Officer" shall mean an officer of Corporation who is not or was not a party to the Proceeding in respect of which indemnification is being sought by Officer. (b) "Expenses" shall include all direct and indirect costs (including, without limitation, attorneys' fees, retainers, court costs, transcripts, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, all other disbursements or out-of-pocket expenses and reasonable compensation for time spent by Officer for which he or she is otherwise not compensated by Corporation) actually and reasonably incurred in connection with a Proceeding or establishing or enforcing a right to indemnification under this Agreement, applicable law or otherwise; provided, however, that "Expenses" shall not include any Liabilities. (c) "Final Adverse Determination" shall mean that a determination that Officer is not entitled to indemnification shall have been made pursuant to Section 5 hereof and either (i) a final adjudication in a California court or decision of an arbitrator pursuant to Section 13(a) hereof shall have denied Officer's right to indemnification hereunder, or (ii) Officer shall have failed to file a complaint in a California court or seek an arbitrator's award pursuant to Section 13(a) for a period of one hundred twenty (120) days after the determination made pursuant to Section 5 hereof. (d) "Independent Legal Counsel" shall mean a law firm or member of a law firm selected by Corporation and approved by Officer (which approval shall not be unreasonably withheld) and that neither is presently nor in the past five years has been retained to represent: (i) Corporation, in any material matter, or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Legal Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either Corporation or Officer in an action to determine Officer's right to indemnification under this Agreement. (e) "Liabilities" shall mean liabilities of any type whatsoever including, but not limited to, any judgments, fines, ERISA excise taxes and penalties, penalties and amounts paid in settlement (including all interest assessments and other charges paid or payable in connection with or in respect of such judgments, fines, penalties or amounts paid in settlement) of any proceeding. (f) "Proceeding" shall mean any threatened, pending or completed action, claim, suit, arbitration, alternative dispute resolution mechanism, investigation, administrative hearing or any other proceeding whether civil, criminal, administrative or investigative, including any appeal therefrom. (g) "Change of Control" shall mean the occurrence of any of the following events after the date of this Agreement: 2 (i) A change in the composition of the Board of Directors of Corporation (the "Board"), as a result of which fewer than two-thirds (2/3) of the incumbent directors are directors who either (1) had been directors of Corporation twenty-four (24) months prior to such change or (2) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of Corporation 24 months prior to such change and who were still in office at the time of the election or nomination; or (ii) Any "person" (as such term is used in section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) through the acquisition or aggregation of securities is or becomes the beneficial owner, directly or indirectly, of securities of Corporation representing twenty percent (20%) or more of the combined voting power of Corporation's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the "Capital Stock"), except that any change in ownership of Corporation's securities by any person resulting solely from a reduction in the aggregate number of outstanding shares of Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of Corporation. 2. INDEMNITY OF OFFICER. Corporation hereby agrees to hold harmless and indemnify Officer to the fullest extent authorized by the provisions of the Code. 3. ADDITIONAL INDEMNITY. Subject only to the limitations set forth in Section 4 hereof, Corporation hereby further agrees to hold harmless and indemnify Officer: (a) against any and all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by Officer in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including an action by or in the right of Corporation) to which Officer is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Officer is, was or at any time becomes a director, officer, employee or agent of Corporation, or is or was serving or at any time serves at the request of Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise; and (b) otherwise to the fullest extent as may be provided to Officer by Corporation under the indemnification non-exclusivity provision of the Articles of Incorporation of Corporation and the Code. 4. LIMITATIONS ON ADDITIONAL INDEMNITY. (a) No indemnity pursuant to Section 3 hereof shall be paid by Corporation for any of the following: (i) except to the extent the aggregate of losses to be indemnified thereunder exceeds the sum of such losses for which Officer is indemnified pursuant to Section 2 hereof or reimbursed pursuant to any D & 0 Insurance purchased and maintained by Corporation; 3 (ii) in respect to remuneration paid to Officer if it shall be determined by a final judgment or other final adjudication that such remuneration was in violation of law; (iii)on account of any suit in which judgment is rendered against Officer for an accounting of profits made from the purchase or sale by Officer of securities of Corporation pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; (iv) on account of Officer's acts or omissions that involve intentional misconduct or a knowing and culpable violation of law if such acts or omission have been established by a judgment or other final adjudication adverse to Officer (an "Adverse Judgment"); (v) provided there has been no Change of Control, on account of or arising in response to any action, suit or proceeding (other than an action, suit or proceeding referred to in Section 14(b) hereof) initiated by Officer or any of Officer's affiliates against Corporation or against any officer, director or shareholder of Corporation unless such proceeding was authorized by the Board of Directors of Corporation; (vi) if a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful; or (vii)on account of any action, suit or proceeding to the extent that Officer is a plaintiff, a counter-complainant or a cross-complainant therein (other than an action, suit or proceeding permitted by Section 4(a)(v) hereof). (b) In addition to those limitations set forth above in paragraph (a) of this Section 4, no indemnity pursuant to Section 3 hereof in an action by or in the right of Corporation shall be paid by Corporation for any of the following: (i) on account of acts or omissions that Officer believes to be contrary to the best interests of Corporation or its shareholders or that involve the absence of good faith on the part of Officer, if so established by an Adverse Judgment; (ii) with respect to any transaction from which Officer derived an improper personal benefit, if so established by an Adverse Judgment; (iii) on account of acts or omissions that show a reckless disregard for Officer's duty to Corporation or its shareholders in circumstances in which Officer was aware, or should have been aware, in the ordinary course of performing an officer's duties, of a risk of serious injury to Corporation or its shareholders, if so established by an Adverse Judgment; 4 (iv) on account of acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of Officer's duty to Corporation or its shareholders, if so established by an Adverse Judgment; (v) in respect of any claim, issue or matter as to which Officer shall have been adjudged to be liable to Corporation in the performance of Officer's duty to Corporation and its shareholders, unless and only to the extent that the court in which such proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Officer is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine; (vi) of amounts paid in settling or otherwise disposing of a pending action without court approval; and (vii)of expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval. 5. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. (a) Whenever Officer believes that he or she is entitled to indemnification pursuant to this Agreement, Officer shall submit a written request for indemnification to Corporation. Any request for indemnification shall include sufficient documentation or information reasonably available to Officer to support his or her claim for indemnification. Officer shall submit his or her claim for indemnification within a reasonable time not to exceed five years after any judgment, order, settlement, dismissal, arbitration award, conviction, acceptance of a plea of nolo contendere or its equivalent, final termination or other disposition or partial disposition of any Proceeding, whichever is the later date for which Officer requests indemnification. The President or the Secretary or other appropriate officer shall, promptly upon receipt of Officer's request for indemnification, advise the Board of Directors in writing that Officer has made such a request. Determination of Officer's entitlement to indemnification shall be made not later than ninety (90) days after Corporation's receipt of his or her written request for such indemnification. (b) The Officer shall be entitled to select the forum in which Officer's request for indemnification will be heard, which selection shall be included in the written request for indemnification required in Section 5(a). This forum shall be any one of the following: (i) The stockholders of Corporation; (ii) A quorum of the Board of Directors consisting of Disinterested Directors; (iii)Independent Legal Counsel, who shall make the determination in a written opinion; or 5 (iv) A panel of three arbitrators, one selected by Corporation, another by Officer and the third by the first two arbitrators selected. If for any reason three arbitrators are not selected within thirty (30) days after the appointment of the first arbitrator, then selection of additional arbitrators shall be made by the American Arbitration Association. If any arbitrator resigns or is unable to serve in such capacity for any reason, the American Arbitration Association shall select his or her replacement. The arbitration shall be conducted pursuant to the commercial arbitration rules of the American Arbitration Association now in effect. If Officer fails to make such designation, his or her claim shall be determined by the forum selected by Corporation. 6. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS. Upon making a request for indemnification, Officer shall be presumed to be entitled to indemnification under this Agreement and Corporation shall have the burden of proof to overcome that presumption in reaching any contrary determination. The termination of any Proceeding by judgment, order, settlement, arbitration award or conviction, or upon a plea of nolo contendere or its equivalent shall not affect this presumption or, except as may be provided in Section 4 hereof, establish a presumption with regard to any factual matter relevant to determining Officer's rights to indemnification hereunder. If the person or persons so empowered to make a determination pursuant to Section 5(b) hereof shall have failed to make the requested determination within thirty (30) days after any judgment, order, settlement, dismissal, arbitration award, conviction, acceptance of a plea of nolo contendere or its equivalent, or other disposition or partial disposition of any Proceeding or any other event which could enable Corporation to determine Officer's entitlement to indemnification, the requisite determination that Officer is entitled to indemnification shall be deemed to have been made. 7. CONTRIBUTION. If the indemnification provided in Sections 2 and 3 is unavailable and may not be paid to Officer for any reason other than those set forth in Section 4 (excluding subsections 4(b) (vi) and (vii)), then in respect of any threatened, pending or completed action, suit or proceeding in which Corporation is or is alleged to be jointly liable with Officer (or would be if joined in such action, suit or proceeding), Corporation shall contribute to the amount of expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Officer in such proportion as is appropriate to reflect (i) the relative benefits received by Corporation on the one hand and Officer on the other hand from the transaction from which such action, suit or proceeding arose, and (ii) to relative fault of Corporation on the one hand and of Officer on the other in connection with the events which resulted in such expenses, judgments, fines or settlement amounts, as well as any other relevant equitable considerations. The relative fault of Corporation on the one hand and of Officer on the other shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such expenses, judgments, fines or settlement amounts. Corporation agrees that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations. 6 8. INSURANCE AND FUNDING. Corporation hereby represents and warrants that it shall purchase and maintain insurance to protect itself and/or Officer against any Expenses and Liabilities in connection with any Proceeding to the fullest extent permitted by California Law. In the event of a Change of Control, Corporation shall establish a letter of credit, as provided in Section 9, to ensure the payment of such amounts as may be necessary to effect indemnification or advancement of Expenses as provided in this Agreement. 9. LETTER OF CREDIT. (a) In order to secure the obligations of Corporation to indemnify and advance Expenses to Officer pursuant to this Agreement, Corporation shall obtain at the time of any Change of Control, upon request of any officer, an irrevocable standby letter of credit naming the officers of the Corporation in office at the time of a Change of Control as joint beneficiaries (the "Letter of Credit"). The Letter of Credit shall be in an appropriate amount not less than one million dollars ($1,000,000), shall be issued by a commercial bank headquartered in the United States having assets in excess of $10 billion and capital according to its most recent published reports equal to or greater than the then applicable minimum capital standards promulgated by such bank's primary federal regulator and shall contain terms and conditions reasonably acceptable to all officers. The Letter of Credit shall provide that Officer may from time to time draw certain amounts thereunder, upon written certification by Officer to the issuer of the Letter of Credit that (i) Officer has made written request upon Corporation for an amount not less than the amount he or she is drawing under the Letter of Credit and that Corporation has failed or refused to provide him with such amount in full within thirty (30) days after receipt of the request, and (ii) Officer believes that he or she is entitled under the terms of this Agreement to the amount which he or she is drawing upon under the Letter of Credit. The issuance of the Letter of Credit shall not, in any way, diminish Corporation's obligation to indemnify Officer against Expenses and Liabilities to the full extent required by this Agreement. (b) Once Corporation has obtained the Letter of Credit, Corporation shall maintain and renew the Letter of Credit or substitute letter of credit meeting the criteria of Section 9(a) during the term of this Agreement so that the Letter of Credit shall have an initial term of five years, be renewed for successive five-year terms, and always have at least one year of its term remaining. 10. CONTINUATION OF OBLIGATIONS. All agreements and obligations of Corporation contained herein shall continue during the period Officer is a director, officer, employee or agent of Corporation (or is or was serving at the request of Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and shall continue thereafter so long as Officer shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal or investigative, by reason of the fact that Officer was serving Corporation or any such other entity in any capacity referred to herein. 7 11. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by Officer of notice of the commencement of any action, suit or proceeding, Officer will, if a claim in respect thereof is to be made against Corporation under this Agreement, notify Corporation of the commencement thereof; but the omission so to notify Corporation will not relieve it from any liability which it may have to Officer otherwise, than under this Agreement. With respect to any such action, suit or proceeding as to which Officer notifies Corporation of the commencement thereof: (a) Corporation will be entitled to participate therein at its own expense; (b) Except as otherwise provided below, to the extent that it may wish, Corporation jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel satisfactory to Officer. After notice from Corporation to Officer of its election so as to assume the defense thereof, Corporation will not be liable to Officer under this Agreement for any legal or other expenses subsequently incurred by Officer in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Officer shall have the right to employ its counsel in such action, suit or proceeding, but the fees and expenses of such counsel incurred after notice from Corporation of its assumption of the defense thereof shall be at the expense of Officer unless (i) the employment of counsel by Officer has been authorized by Corporation, (ii) Officer shall have reasonably concluded that there may be a conflict of interest between Corporation and Officer in the conduct of the defense of such action or (iii) Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel shall be at the expense of Corporation. Corporation shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of Corporation or as to which Officer shall have made the conclusion provided for in (ii) above; and (c) Provided there has been no Change of Control, Corporation shall not be liable to indemnify Officer under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent, which consent shall not be unreasonably withheld. Corporation shall not settle any action or claim in any manner which would impose any penalty or limitation on Officer without Officer's written consent. 12. ADVANCEMENT AND REPAYMENT OF EXPENSES. (a) In the event that Officer employs his or her own counsel pursuant to Section 11(b)(i) through (iii) above, Corporation shall advance to Officer, prior to any final disposition of any threatened or pending action, suit or proceeding, whether civil, criminal, administrative or investigative, any and all reasonable expenses (including legal fees and expenses) incurred in investigating or defending any such action, suit or proceeding within ten (10) days after receiving copies of invoices presented to Officer for such expenses; (b) Officer agrees that Officer will reimburse Corporation for all reasonable expenses paid by Corporation in defending any civil or criminal action, suit or proceeding against Officer 8 in the event and only to the extent it shall be ultimately determined by a final judicial decision (from which there is no right of appeal) that Officer is not entitled, under applicable law, the Bylaws, this Agreement and otherwise, to be indemnified by Corporation for such expenses. 13. REMEDIES OF OFFICER. (a) In the event that (i) a determination pursuant to Section 5 hereof is made that Officer is not entitled to indemnification, (ii) advances of Expenses are not made pursuant to this Agreement, (iii) payment has not been timely made following a determination of entitlement to indemnification pursuant to this Agreement, or (iv) Officer otherwise seeks enforcement of this Agreement, Officer shall be entitled to a final adjudication in an appropriate court of the State of California of his or her rights. Alternatively, Officer at his or her option may seek an award in arbitration to be conducted by a single arbitrator pursuant to the commercial arbitration rules of the American Arbitration Association now in effect, whose decision is to be made within ninety (90) days following the filing of the demand for arbitration. The Corporation shall not oppose Officer's right to seek any such adjudication or arbitration award. (b) In the event that a determination that Officer is not entitled to indemnification, in whole or in part, has been made pursuant to Section 5 hereof, the decision in the judicial proceeding or arbitration provided in paragraph (a) of this Section 13 shall be made de novo and Officer shall not be prejudiced by reason of a determination that he or she is not entitled to indemnification. (c) If a determination that Officer is entitled to indemnification has been made pursuant to Section 5 hereof or otherwise pursuant to the terms of this Agreement, Corporation shall be bound by such determination in the absence of (i) a misrepresentation of a material fact by Officer or (ii) a specific finding (which has become final) by an appropriate court of the State of California that all or any part of such indemnification is expressly prohibited by law. (d) In any court proceeding pursuant to this Section 13, Corporation shall be precluded from asserting that the procedures and presumptions of this Agreement are not valid, binding and enforceable. The Corporation shall stipulate in any such court or before any such arbitrator that Corporation is bound by all the provisions of this Agreement and is precluded from making any assertion to the contrary. (e) Expenses reasonably incurred by Officer in connection with his or her request for indemnification under this Agreement, meeting enforcement of this Agreement or to recover damages for breach of this Agreement shall be borne by Corporation. (f) Corporation and Officer agree herein that a monetary remedy for breach of this Agreement, at some later date, will be inadequate, impracticable and difficult of proof, and further agree that such breach would cause Officer irreparable harm. Accordingly, Corporation and Officer agree that Officer shall be entitled to temporary and permanent injunctive relief 9 to enforce this Agreement without the necessity of proving actual damages or irreparable harm. The Corporation and Officer further agree that Officer shall be entitled to such injunctive relief, including temporary restraining orders, preliminary injunctions and permanent injunctions, without the necessity of posting bond or other undertaking in connection therewith. Any such requirement of bond or undertaking is hereby waived by Corporation, and Corporation acknowledges that in the absence of such a waiver, a bond or undertaking may be required by the court. 14. ENFORCEMENT. (a) Corporation expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on Corporation hereby in order to induce Officer to continue as an officer of Corporation, and acknowledges that Officer is relying upon this Agreement in continuing in such capacity. (b) In the event Officer is required to bring any action to enforce rights or to collect moneys due under this Agreement and is successful in such action, Corporation shall reimburse Officer for all of Officer's reasonable attorneys' fees and expenses in bringing and pursuing such action. 15. SEPARABILITY. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision hereof shall be held to be invalid or unenforceable to any extent for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof, and the affected provision shall be construed and enforced so as to effectuate the parties' intent to the maximum extent possible. 16. GOVERNING LAW. This Agreement shall be governed by and interpreted and enforced in accordance with the laws of the State of California. 17. CONSENT TO JURISDICTION. The Corporation and Officer each irrevocably consent to jurisdiction of the courts of the State of California for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of California. 18. BINDING EFFECT. This Agreement shall be binding upon Officer and upon Corporation, its successors and assigns, and shall inure to the benefit of Officer, his or her heirs, personal representatives and assigns and to the benefit of Corporation, its successors and assigns. 19. ENTIRE AGREEMENT. This Agreement represents the entire agreement between the parties hereto and there are no other agreements, contracts or understandings between the parties hereto with respect to the subject matter of this Agreement, except as specifically referred to herein. This Agreement supersedes any and all agreements regarding indemnification heretofore entered into by the parties. 10 20. AMENDMENT AND TERMINATION. No amendment, modification, waiver, termination or cancellation of this Agreement shall be effective for any purpose unless set forth in writing signed by both parties hereto. 21. SUBROGATION. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Officer, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable Corporation effectively to bring suit to enforce such rights. 22. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Officer by this Agreement shall not be exclusive of any other right which Officer may have or hereafter acquire under any statute, provision of Corporation's Articles of Incorporation or Bylaws, agreement vote of shareholders or directors, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding office. 23. SURVIVAL OF RIGHTS. The rights conferred on Officer by this Agreement shall continue after Officer has ceased to be a director, officer, employee or other agent of Corporation and shall inure to the benefit of Officer's heirs, executors and administrators. 24. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be addressed to Officer or to Corporation, as the case may be, at the address shown on page 1 of this Agreement, or to such other address as may have been furnished by either party to the other, and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed. 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. OFFICER: CORPORATION: DURA PHARMACEUTICALS, INC. By: - ----------------------------- ----------------------------- (Signature) (Signature) Cam L. Garner, Chairman, President & CEO - ----------------------------- ---------------------------------------- Printed Name Printed Name and Title 12 EX-10.81 4 LETTER AGREEMENTS EXHIBIT 10.81 March 1, 1995 Dura Pharmaceuticals, Inc. 5880 Pacific Center Blvd. San Diego, CA 92121-4204 Ladies and Gentlemen: Reference is made to 342,857 shares (the "Company") of Common Stock of Dura Pharmaceuticals, Inc. (the "Company") evidenced by the Certificates issued on March 1, 1995 (the "Securities") which the undersigned is acquiring pursuant to a transfer from Elan Corporation, plc ("Transferor"). This will confirm to you that the undersigned will take the Securities subject to, and bound by, all the terms and conditions contained in all written agreements between the Transferor and the Company concerning the Securities including, but not limited to, a certain Stock and Warrant Purchase Agreement dated April 17, 1994 and a certain Registration Rights Agreement dated April 17, 1994. The undersigned hereby confirms to you that the undersigned (a) is not acquiring the Securities with the intention of distributing them within the meaning of the Securities Act of 1933, as amended, and (b) will abide by the transfer restrictions on the Securities resulting from said agreements. It is the undersigned's understanding that the certificate evidencing the Securities will bear legends which restrict the sale, transfer or other disposition of the Securities. Very truly yours, ELAN INTERNATIONAL SERVICES LIMITED By: /s/ KEVIN INSLEY ---------------- Title: Vice President -------------- EXHIBIT 10.81 September 3, 1996 Dura Pharmaceuticals, Inc. 5880 Pacific Center Blvd. San Diego, Ca. 92121-4204 Ladies and Gentlemen: Reference is made to the Warrant to Purchase 600,000 shares (after giving effects to the 2 for 1 stock split in the form of a 100% dividend declared by the Board of Directors of Dura Pharmaceuticals, Inc. (the "Company") effective July 1, 1996) of Common Stock of the Company evidenced by Common Stock Purchase Warrant Series E-1 (the "Securities") which the undersigned is acquiring pursuant to a transfer from Elan Corporation, plc ("Transferor"). This will confirm to you that the undersigned will take the Securities subject to all the terms and conditions contained in all written agreements between the Transferor and the Company concerning the Securities including, but not limited to, a certain Stock and Warrant Purchase Agreement dated April 17, 1994 and a certain Registration Rights Agreement dated April 17, 1994. The undersigned hereby confirms to you that the undersigned (a) is not acquiring the Securities with the intention of distributing them within the meaning of the Securities Act of 1933, as amended, and (b) will abide by transfer restrictions on the Securities resulting from said agreements. It is the undersigned's understanding that the certificate evidencing the Securities will bear legends which restrict the sale, transfer or other disposition of the Securities. Very truly yours, ELAN INTERNATIONAL SERVICES LIMITED /s/ KEVIN INSLEY Vice President & Director EX-10.82 5 FORM OF COMMON STOCK PURCHASE WARRANT EXHIBIT 10.82 No. Series E-2 600,000 Shares COMMON STOCK PURCHASE WARRANT THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND COMPLIANCE WITH SUCH LAWS, THESE SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS AND UPON OBTAINING AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL FOR THE COMPANY), SATISFACTORY TO THE COMPANY, THAT SUCH DISPOSITION MAY BE MADE WITHOUT REGISTRATION OF THE SECURITIES UNDER SUCH ACT AND SUCH LAWS, OR, WITH RESPECT TO FEDERAL SECURITIES LAWS ONLY, UNLESS SOLD PURSUANT TO RULE 144. THESE SECURITIES ARE SUBJECT TO CERTAIN TRANSFER RESTRICTIONS CONTAINED IN A CERTAIN STOCK AND WARRANT PURCHASE AGREEMENT DATED APRIL 17, 1994, A COPY OF WHICH MAY BE OBTAINED FROM THE CORPORATION WITHOUT CHARGE. DURA PHARMACEUTICALS, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA THIS CERTIFIES THAT, for value received, Elan International Services Limited ("Holder"), is entitled to purchase, on the terms hereof, Six Hundred Thousand (600,000) fully paid and nonassessable shares of Common Stock, no par value (the "Common Stock") of Dura Pharmaceuticals, Inc., a California corporation (the "Company"). The total number of shares of Common Stock and the Exercise Price (as defined below) set forth in this Common Stock Purchase Warrant have been determined after giving effect to the 2 for 1 stock split in the form of a 100% dividend declared by the Company's Board of Directors effective July 1, 1996. 1. EXERCISE OF WARRANT. The terms and conditions upon which this Warrant may be exercised, and the Common Stock covered hereby (the "Warrant Shares") may be purchased, are as follows: 1.1 TERM. This Warrant may be exercised in whole or in part at any time after October 17, 1994, but at or prior to 5:00 p.m. Pacific time on April 17, 1999, after which time this Warrant shall terminate and shall be void and of no further force or effect. 1.2 PURCHASE PRICE. The per share purchase price for the shares of Common Stock to be issued upon exercise of this Warrant (the "Exercise Price") shall be $4.38, subject to adjustment as provided herein. 1.3 METHOD OF EXERCISE. The exercise of the purchase rights evidenced by this Warrant shall be effected by (i) the surrender of the Warrant, together with a duly executed copy of the form of subscription attached hereto, to the Company at its principal offices and (ii) the delivery of the Exercise Price by check or bank draft payable to the Company's order for the number of shares for which the purchase rights hereunder are being exercised or by wire transfer of the Exercise Price to the Company's designated bank account. 1.4 ISSUANCE OF SHARES. Upon the exercise of the purchase rights evidenced by this Warrant, a certificate or certificates for the purchased shares shall be issued to the Holder as soon as practicable. 2. CERTAIN ADJUSTMENTS. 2.1 MERGERS, CONSOLIDATIONS OR SALE OF ASSETS. If at any time there shall be a capital reorganization (other than a combination or subdivision of shares of Common Stock otherwise provided for herein), or a merger or consolidation of the Company with or into another corporation or any sale of all or substantially all of the Company's assets to another entity in which holders of shares of the Company's Common Stock will receive in exchange therefor other securities or assets, then, as a condition to the closing of such reorganization, merger, consolidation or sale, lawful provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified in this Warrant and upon payment of the Exercise Price, in lieu of the Warrant Shares issuable upon exercise of the Warrant, the number of shares of stock or other securities or property of the Company or the successor corporation resulting from such reorganization, merger, consolidation or sale to which Holder would have been entitled under the provisions of the agreement in such reorganization, merger, consolidation or sale if this Warrant had been exercised immediately before that reorganization, merger, consolidation or sale. In any such case, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder after the reorganization, merger, consolidation or sale to the end that the provisions of this Warrant (including adjustment of the Exercise Price then in effect and the number of Warrant Shares that may be purchased upon exercise of the Warrant) shall be applicable after that event, as near as reasonably may be practicable, in relation to any shares of stock or other securities or property deliverable after that event upon exercise of this Warrant. The Company shall not effect any such reorganization, merger, consolidation or sale unless prior to the consummation thereof, the successor entity (if other than the Company) resulting from such reorganization, merger or consolidation or the entity purchasing such assets, shall assume by written instrument executed and delivered to the Company the obligation to deliver to Holder such shares of stock or other securities or property as, in accordance with the foregoing provisions, the Holder may be entitled to purchase. 2.2 SPLITS AND SUBDIVISIONS. In the event the Company should at any time or from time to time fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or issue by reclassification of its Common Stock any other shares representing common equity of the Company or pay a dividend on its Common Stock in shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as the "Common Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or Common Equivalents, then, as of such record date (or the date of -2- such distribution, split, subdivision or reclassification if no record date is fixed), the applicable Exercise Price shall be appropriately decreased and the number of Warrant Shares issuable upon exercise of the Warrant shall be appropriately increased in proportion to such increase of outstanding shares of Common Stock. 2.3 COMBINATION OF SHARES. If the number of shares of Common Stock outstanding at any time after the date hereof is decreased by a combination or reclassification of the outstanding shares of Common Stock, then from and after the record date for such combination or reclassification the applicable Exercise Price shall be appropriately increased and the number of Warrant Shares issuable upon exercise of the Warrant shall be appropriately decreased in proportion to such decrease in outstanding shares of Common Stock. 2.4 ADJUSTMENTS FOR OTHER DISTRIBUTIONS. In the event the Company shall distribute to all holders of shares of its Common Stock evidences of indebtedness or assets (including securities issued by the Company or by any other entity, but excluding (i) any shares or securities referred to in subsection 2.1 or 2.2 above and (ii) cash distributions in any fiscal year not exceeding 5% in the aggregate of the net income of the Company for the immediately preceding fiscal year, as determined in accordance with generally accepted accounting principals) then in each such case the Exercise Price to be in effect after such distribution shall be determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the current market price (as defined below) per share of the Common Stock less the then fair market value (as reasonably determined by the Board of Directors of the Company) of the portion of the assets or evidences of indebtedness so distributed applicable to one share of Common Stock and the denominator of which shall be the current market price per share of Common Stock as of the date of such distribution. Such adjustment shall become effective immediately after the record date for the determination of shareholders entitled to receive such distribution. For purposes of this subsection 2.4, the current market price per share of Common Stock at any date shall be deemed to be the average of the daily Closing Prices (as defined below) for 10 consecutive Trading Days (as defined below) selected by the Company commencing not more than 30 Trading Days before the date in question. The term "Closing Price" on any day shall mean the reported last sale price per share of Common Stock regular way on such day or, in case no such sale takes place on such day, the average of the reported closing bid and asked prices regular way, in each case on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if the Common Stock is not listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices in the over-the-counter market as reported by the National Association of Securities Dealers' Automated Quotation System, or, if not so reported, as reported by the National Quotation Bureau, Incorporated, or any successor thereof, or, if not so reported, the average of the closing bid and asked prices as furnished by any member of the National Association of Securities Dealers, Inc. selected from time to time by the Company for that purpose; and the term "Trading Day" shall mean a day on which the principal national securities exchange on which the Common Stock is listed or admitted to trading is open for the transaction of business or, if the Common Stock is not listed or admitted to trading on any national securities exchange, a Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in the City of New York, New York are not authorized or obligated by law or executive order to close. 2.5 CERTIFICATE AS TO ADJUSTMENTS. In the case of each adjustment or readjustment of the Exercise Price pursuant to this Section 2, the Company will promptly compute such adjustment or readjustment in accordance with the terms hereof and cause a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based to be delivered to the Holder. The Company will, upon the written request at any time of the Holder, furnish or cause to be furnished to such -3- Holder a certificate setting forth: a. Such adjustments and readjustments; b. The Exercise Price at the time in effect; and c. The number of shares of Warrant Shares and the amount, if any, of other property at the time receivable upon the exercise of the Warrant. 2.6 NOTICES OF RECORD DATE, ETC. In the event of: a. Any taking by the Company of a record of the holders of any class of securities of the Company for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend payable out of earned surplus at the same rate as that of the last such cash dividend theretofore paid) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right; or b. Any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all of assets of the Company to any other person or any consolidation or merger involving the Company; or c. Any voluntary or involuntary dissolution, liquidation or winding-up of the Company; the Company will mail to the holder of this Warrant, at least twenty (20) days prior to the earliest date specified therein, a notice specifying: (i) The date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right; and (ii) The date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding-up is expected to become effective and the record date for determining shareholders entitled to vote thereon. 3. FRACTIONAL SHARES. No fractional shares shall be issued in connection with any exercise of this Warrant. In lieu of the issuance of such fractional share, the Company shall make a cash payment equal to the then fair market value of such fractional share as determined in good faith by the Company's Board of Directors. 4. RESERVATION OF SHARES. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the exercise of this Warrant, such number of its shares of Common Stock as shall from time to time be sufficient to effect the exercise in full of this Warrant; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the exercise of the entire Warrant, in addition to such other remedies as shall be available to the Holder, the Company will use its reasonable best efforts to take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. 5. PRIVILEGES OF STOCK OWNERSHIP. Except as set forth herein, prior to the exercise of -4- this Warrant, the Holder shall not be entitled, by virtue of holding this Warrant, to any rights of a shareholder of the Company. 6. LIMITATION OF LIABILITY. Except as otherwise provided herein, in the absence of affirmative action by the Holder to purchase the Warrant Shares, no mere enumeration herein of the rights or privileges of the Holder shall give rise to any liability of such Holder for the Exercise Price or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 7. TRANSFERS AND EXCHANGES. 7.1 Without the prior written consent of the Company, neither this Warrant nor any interest in it may be transferred by the Holder. Any transfer permitted by the Company shall be subject to compliance with applicable federal and state securities laws. Any permitted transfer shall be recorded on the books of the Company upon the surrender of this Warrant, properly endorsed, to the Company at its principal offices and the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer. In the event of a permitted partial transfer, the Company shall issue to the several holders one or more appropriate new warrants. 7.2 In the event of a partial exercise of this Warrant, the Company shall issue an appropriate new warrant to the Holder. 7.3 All new warrants issued in connection with transfers, exchanges or partial exercises shall be identical in form and provision to this Warrant except as to the number of shares. 7.4 Certificates evidencing the Warrant Shares shall bear the following legend: "These securities are subject to certain transfer restrictions contained in a certain Stock and Warrant Purchase Agreement dated April 17, 1994, a copy of which may be obtained from the corporation without charge." 8. SUCCESSORS AND ASSIGNS. The terms and provisions of this Warrant shall be binding upon the Company and the Holder and their respective successors and assigns. 9. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to the Company, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 10. SATURDAYS, SUNDAYS, HOLIDAYS, ETC. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or Sunday or shall be a legal holiday, then such action may be taken or such right may be exercised, except as to payment of the Exercise Price, on the next succeeding day not a legal holiday. -5- 11. AMENDMENTS AND WAIVERS; CANCELLATION. Any term of this Warrant may be amended and the observance of any term of this Warrant may be waived (either generally or in a particular instance and either retroactively or prospectively), with the written consent of the Company and the Holder. Dated: September 3, 1996 DURA PHARMACEUTICALS, INC. By: /s/ MITCHELL R. WOODBURY ------------------------ Title: Vice President -------------- The undersigned Holder agrees and accepts this Warrant and acknowledges that it has read and confirms each of the representations contained in Section 3 of the Purchase Agreement. ELAN INTERNATIONAL SERVICES LIMITED By: /s/ KEVIN INSLEY ---------------- Title: Vice President and Director --------------------------- [SIGNATURE PAGE TO COMMON STOCK PURCHASE WARRANT] SUBSCRIPTION Dura Pharmaceuticals, Inc. 5880 Pacific Center Blvd. San Diego, California 92121 Ladies and Gentlemen: The undersigned, Elan International Services Limited, hereby elects to purchase, pursuant to the provisions of the Series E-2 Warrant (exercisable for the aggregate amount of 600,000 shares) held by the undersigned, _________ shares of the Common Stock of Dura Pharmaceuticals, Inc., a California corporation at $4.38 per share of Common Stock, and directs that the shares of Common Stock elected to be purchased be registered or placed in the name and at the address specified below and delivered thereto. The undersigned hereby confirms and acknowledges the investment representations and warranties made in the Stock and Warrant Purchase Agreement dated as of April 17, 1994 between Dura Pharmaceuticals, Inc. and Elan Corporation, plc, as if such representations and warranties had been made by the undersigned, and reaffirms each of such representations and warranties as of the date hereof and accepts such shares subject to the restrictions of such Agreement. Dated: _____________ , _____ Elan International Services Limited By:________________________________ Its:_______________________________ Address:____________________________________ ____________________________________ EX-10.102 6 MANUFACTURING AGREEMENT EXHIBIT 10.102* MANUFACTURING AGREEMENT This MANUFACTURING AGREEMENT is entered into as of August 21, 1996, by and between DURA PHARMACEUTICALS, INC. ("Dura"), a corporation organized and existing under the laws of the State of California, with offices at 5880 Pacific Center Boulevard, San Diego, California 92121-4204 and ELI LILLY AND COMPANY ("Lilly"), a corporation organized and existing under the laws of the State of Indiana, with offices at Lilly Corporate Center, Indianapolis, Indiana 46285. RECITALS 1. Subject to the terms and conditions set forth in this Agreement, Dura wishes to have Lilly manufacture for Dura certain anti-infective pharmaceutical products; and 2. Subject to the terms and conditions set forth in this Agreement, Lilly wishes to manufacture such anti-infective pharmaceutical products for Dura. NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: SECTION 1 DEFINITIONS For purposes of this Agreement, the following terms shall have the meanings set forth below: "AFFILIATES" shall mean, with respect to any Person, any Persons directly or indirectly controlling, controlled by, or under common control with, such other Person. For purposes hereof, the term "controlled" (including the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the direct or indirect ability or power to direct or cause the direction of management policies of such Person or otherwise direct the affairs of such Person, whether through ownership of voting securities or otherwise. - -------------------------------------- * CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED BY MEANS OF MARKING SUCH PORTIONS WITH AN ASTERISK (THE "MARK"). THIS EXHIBIT HAS BEEN FILED WITH THE SECRETARY OF THE COMMISSION WITHOUT THE MARK PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. "APPLICABLE LAWS" shall mean all applicable federal, state and local laws, ordinances, rules and regulations of any kind whatsoever, including, without limitation, the Federal Food, Drug and Cosmetic Act. "BULK PATENTS" shall have the meaning given in Section 1 of the Licensing Agreement. "BULK TECHNOLOGY" shall have the meaning given in Section 1 of the Licensing Agreement. "CLOSING DATE" shall have the meaning given in Section 4.3 of the Licensing Agreement. "DAMAGES" shall mean any and all costs, losses, claims, liabilities, fines, penalties, damages and expenses, court costs, and reasonable fees and disbursements of counsel, consultants and expert witnesses incurred by a party hereto (including interest which may be imposed in connection therewith). "FDA" shall mean the United States Food and Drug Administration. "GOOD MANUFACTURING PRACTICES" or "GMP" shall mean current Good Manufacturing Practices as defined in 21 CFR Section 210 ET SEQ., as amended. "LICENSED ASSETS" shall have the meaning given in Section 2.1 of the Licensing Agreement. "LICENSING AGREEMENT" shall mean the Licensing Agreement, dated as of the date of this Agreement, between Lilly and Dura, which provides for the licensing of certain rights by Lilly to Dura in connection with the Products for the period specified therein. "NDAS" shall mean, with respect to Ceclor-Registered Trademark- CD (cefaclor extended release tablets), New Drug Application Number 50-673, and, with respect to Keftab-Registered Trademark- (cephalexin hydrochloride), New Drug Application Number 50-614, each as filed by Lilly with the FDA and all subsequent submissions thereto. -2- "PERSON" shall mean a natural person, a corporation, a partnership, a trust, a joint venture, a limited liability company, any governmental authority or any other entity or organization. "PRODUCT PATENTS" shall have the meaning given in Section 1 of the Licensing Agreement. "PRODUCT TECHNOLOGY" shall have the meaning given in Section 1 of the Licensing Agreement. "PRODUCTS" shall mean those products listed in EXHIBIT A attached hereto. "PURCHASE ORDER" shall mean a purchase order from Dura to Lilly for any of the Products issued in accordance with the provisions of the Requirements Document. "REQUIREMENTS DOCUMENT" shall mean the Manufacturing Requirements Document attached hereto as APPENDIX A, as amended from time to time, setting forth various manufacturing and operational terms and procedures for implementing this Agreement. "SPECIFICATIONS" shall mean the specifications for manufacturing and testing each of the Products and the related methods and stability protocols and procedures as set forth in the approved NDAs and any supplements and amendments thereto. "UNITED STATES" shall mean the fifty (50) states and the District of Columbia comprising the United States of America. SECTION 2 PURCHASING, PRICING, AND PAYMENT 2.1. PURCHASE OF EXISTING INVENTORY AND CONTRIBUTION OF EXISTING SAMPLES. Dura shall purchase Lilly's inventory of the Products existing as of the Closing Date in the quantities and at the prices set forth in EXHIBIT B -3- attached hereto. Dura shall also purchase at such time Ceclor CD samples in the quantity and at the price set forth in EXHIBIT B. In addition, Lilly shall contribute to Dura samples in the quantities and on the dates set forth in EXHIBIT B. Dating shall be as follows: (a) with respect to existing Ceclor CD samples, the expiration date shall be no earlier than June 30, 1997 (Dura agrees to make a good faith effort to distribute these while in date.); (b) with respect to the initial *** sample units of existing Keftab samples, the expiration date shall be no earlier than October 31, 1997; and (c) with respect to existing Keftab trade inventory, the expiration date shall be no earlier than August 31, 1997 (Dura agrees to make a good faith effort to distribute these while in date.). 2.2. PURCHASE AND PRICE OF FUTURE PRODUCTS AND SAMPLES. Dura shall purchase from Lilly all its requirements for future Products and samples at the prices set forth in EXHIBIT C attached hereto. Dating shall be as follows: (a) with respect to all future purchases of Ceclor CD samples and trade bottles, the expiration date shall be no earlier than eighteen (18) months from the date of shipment; and (b) with respect to all future purchases of Keftab samples and trade bottles, the expiration date shall be no earlier than sixteen (16) months from the date of shipment. 2.3. PURCHASE ORDERS. Dura shall provide Lilly with Purchase Orders in accordance with the Requirements Document. Each Purchase Order shall be governed by the terms of this Agreement and none of the terms or conditions of Dura's Purchase Orders, Lilly's acknowledgment forms or any other forms shall be applicable, except those specifying quantity ordered, delivery locations and delivery schedule and invoice information. Each Purchase Order shall constitute a binding obligation upon Dura to accept and pay for the quantities of Products ordered therein if, and to the extent that, such Products meet the Specifications. -4- - -------------------------------------- * CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED BY MEANS OF MARKING SUCH PORTIONS WITH AN ASTERISK (THE "MARK"). THIS EXHIBIT HAS BEEN FILED WITH THE SECRETARY OF THE COMMISSION WITHOUT THE MARK PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 2.4. TERMS OF PAYMENT. Dura agrees to pay for all invoices within thirty- five (35) days from the date of the applicable invoice at the prices computed in accordance with the Requirements Document. All payments to Lilly shall be made by check or bank draft to the following address and shall indicate to which invoice(s) payment applies: Eli Lilly and Company P.O. Box 951021 Dallas, TX 75395-1021 2.5. TRANSITION PLAN. Dura shall perform its obligations set forth in the Transition Plan attached hereto as APPENDIX B. 2.6. AUDITS. The ability to conduct audits shall be provided under and pursuant to and in accordance with the terms of Section 3.4 of the Licensing Agreement, which terms are by this reference incorporated in and made a part of this Agreement, and all of which for purposes of this Agreement shall survive any termination or expiration of the Licensing Agreement. SECTION 3 OBLIGATIONS OF LILLY 3.1. MANUFACTURING; REQUIREMENTS; DELIVERY. (a) Lilly, or a third party under subcontract with Lilly (subject to receipt of any required FDA approvals), shall manufacture, package, label, test, prepare for shipment and ship Products to Dura at and from Lilly's facilities at the times and in the quantities set forth by Dura in the Purchase Orders and as provided for in the Requirements Document. Each shipment of Products shall include a certificate of analysis confirming that the Products therein meet the Specifications. -5- 3.2. QUALITY CONTROL AND ASSURANCE. (a) Lilly, or a third party under subcontract with Lilly (subject to receipt of any required FDA approvals), shall manufacture the Products in full compliance with the approved NDAs and in accordance with all Applicable Laws. Lilly shall perform quality control and quality assurance testing on Products to be delivered to Dura hereunder in accordance with the Specifications and the Requirements Document. (b) Personnel from Dura shall, upon reasonable advance notice to Lilly, have access during normal business hours to Lilly's premises where the Products are being manufactured, tested, inspected, packaged and/or stored to observe and inspect the manufacturing, quality control and testing processes for, and the records of all production and quality assurance data related to, the Products. Personnel from Lilly shall have the same rights provided to personnel from Dura under this Section 3.2(b) if, prior to Lilly's transfer of the Licensed Assets to Dura pursuant to Section 2.4 of the Licensing Agreement, Dura (or a third party sublicensee of Dura) is manufacturing either or both of the Products. 3.3. RECORDS AND ACCOUNTING BY LILLY. Lilly shall, with respect to each lot of the Products produced by it hereunder, for a period of three (3) years after the expiry of the expiration dating of such lot, keep accurate records of the manufacture and testing of the Products produced by it hereunder, including, without limitation, all such records which are required under Applicable Laws. Access to such records shall be made available by Lilly to Dura upon Dura's request. 3.4. TRANSITION PLAN. Lilly shall perform its obligations set forth in the Transition Plan attached hereto as APPENDIX B. -6- SECTION 4 LABELING AND TESTING PRODUCTS 4.1. LABELING AND PACKING. The Products shall be labeled, prepared and packed for shipment in full compliance with the approved NDAs, all Applicable Laws, and in accordance with the Requirements Document. 4.2. LOT NUMBERING. Lot numbers shall be affixed on the containers for the Products and on each shipping carton in accordance with Applicable Laws, Lilly's customary practice, and in accordance with the Requirements Document. 4.3. TESTING AND REJECTION OF DELIVERED PRODUCTS. (a) Dura shall be entitled, at its cost and expense, to test any and all Products delivered to it hereunder to determine whether such Products comply with the Specifications. Dura shall notify Lilly in writing promptly, and in any event not later than thirty (30) days after its receipt thereof, if it rejects any Products delivered to it by reason of the failure of such Products to meet the Specifications. Products not rejected within such thirty (30) day period shall be deemed accepted. Lilly shall use reasonable efforts to replace the rejected Products with Products which meet the Specifications within the shortest possible time and shall deliver such replacement Products, at its sole cost and expense, to Dura. In addition, Lilly shall, at its sole cost and expense, arrange for all such noncomplying Products to be picked up promptly in accordance with all Applicable Laws. Dura shall have no responsibility to Lilly for the purchase prices of nonconforming Products but shall pay Lilly the purchase prices for the replacement Products within 30 days of delivery thereof. (b) Notwithstanding subsection (a) above, if Dura and Lilly disagree on whether any Products comply with the -7- Specifications or on the methods for or results of testing of any of the Products, an independent laboratory which is acceptable to both parties shall be asked to test the Products in dispute ("Disputed Products"). To the extent such laboratory finds that the Disputed Products meet the Specifications, Dura shall pay the fees of such laboratory related to such testing and shall promptly pay for the Disputed Products. To the extent that such laboratory finds that the Disputed Products fail to meet the Specifications, Lilly shall pay the fees of such laboratory related to such testing and shall replace the Disputed Products in accordance with the preceding subsection (a). Both parties hereby agree to accept and be bound by the findings of such independent laboratory. SECTION 5 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PARTIES. 5.1. PRODUCT SPECIFICATIONS AND DELIVERY. (a) Lilly hereby warrants to Dura that (i) all of the existing Product inventory and samples purchased by Dura pursuant to Section 2.1, and (ii) all future Dura purchases of Products and samples shall, at the date shipped to Dura, fully conform to the Specifications and have been manufactured in full compliance with the Specifications and all Applicable Laws. Lilly further warrants to Dura that upon delivery of any Products pursuant hereto, including Lilly's inventory and samples of the Products contemplated in Section 2.1 hereof, good title to such Products shall convey to Dura and that such conveyance shall be free and clear of any security interest, other lien or encumbrance. (b) Lilly hereby represents and warrants to Dura that it has the capacity, and subject to the terms and conditions contained -8- herein, will maintain the capacity throughout the term of this Agreement, to meet the requirements of Dura under this Agreement. (c) EXCEPT AS EXPRESSLY PROVIDED IN SECTIONS 5.1(a) AND (d), LILLY MAKES NO REPRESENTATION OR WARRANTY AS TO ANY PRODUCTS, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, BY STATUTE OR OTHERWISE, AND LILLY SPECIFICALLY DISCLAIMS ANY AND ALL IMPLIED OR STATUTORY WARRANTIES, INCLUDING WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY, WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR WARRANTY OF NONINFRINGEMENT. (d) Nothing contained in this Agreement is intended to limit or otherwise affect any representation or warranty provided in the Licensing Agreement. (e) Lilly hereby covenants that it shall use reasonable efforts to assure that all of the shipments of Products ordered by Dura pursuant to a Purchase Order are shipped timely in accordance with the directions contained in such Purchase Order. 5.2. INDEMNIFICATION. Indemnification shall be provided under and pursuant to and in accordance with the terms of Section 8 of the Licensing Agreement, which terms are by this reference incorporated in and made a part of this Agreement, and all of which for purposes of this Agreement shall survive any termination or expiration of the Licensing Agreement. 5.3. NOT DEBARRED. Dura and Lilly each hereby represent and warrant to the other that it is not debarred and has not and will not knowingly use in any capacity the services of any person debarred under subsections 306(a) or (b) of the Generic Drug Enforcement Act of 1992. If at any time this -9- representation and warranty is no longer accurate, Dura or Lilly, as the case may be, shall immediately notify the other of such fact. SECTION 6 TERM OF AGREEMENT, RENEWAL, TERMINATION 6.1. TERM OF AGREEMENT. Unless sooner terminated in accordance with this Section 6, this Agreement shall take effect and commence on the Closing Date and continue in effect for *** which will expire on the date that is *** from the Closing Date. *** as hereinafter set forth. 6.2. TERMINATION *** (a) Subject to the provisions of Section 6.6, this Agreement may be terminated *** with respect to *** at any time after the *** term of this Agreement without cause upon the occurrence of *** (i) the giving of at least *** at any time subsequent to the end of the *** of this Agreement (the *** (ii) *** using reasonable efforts to *** that quantity of the Product or Products, as appropriate, *** the end of the *** to meet anticipated demand therefor *** (the *** The effective date of the termination of this Agreement shall be the later of the last day of the *** or the day on which *** In the event of such termination under this Section 6.2(a), *** shall provide such reasonable assistance *** as may be reasonably necessary to (x) obtain any and all *** as may be necessary to enable *** the Product or Products, as -10- - -------------------------------------- * CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED BY MEANS OF MARKING SUCH PORTIONS WITH AN ASTERISK (THE "MARK"). THIS EXHIBIT HAS BEEN FILED WITH THE SECRETARY OF THE COMMISSION WITHOUT THE MARK PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. appropriate, in the United States (subject to (z) below, excluding any such *** relating to the *** (y) effect the transfer of *** for the Product or Products, as appropriate, *** or a third party *** designated by *** for which *** shall *** for all of *** reasonable *** in connection therewith, and (z) enable *** to obtain a reasonable *** necessary for the *** of the Product or Products, as appropriate, in *** manners: (1) if on the effective date of the termination of this Agreement *** is engaged in *** as appropriate, *** to third parties, then *** shall be required to *** with an amount of *** as appropriate, equal to the amount of *** as appropriate, purchased by *** (as reflected by *** as appropriate) under this Agreement in the previous *** at a price *** as appropriate, *** offered to similar third parties and as set forth in *** in the *** (2) if on the effective date of the termination of this Agreement *** is no longer engaged in *** as appropriate, *** to third parties, then *** shall be required to *** for the *** is not then *** which *** shall be used by *** solely for purposes of *** in accordance with the terms set forth in Section 2.2(b) of the Licensing Agreement. *** shall *** for all of *** in connection therewith. Notwithstanding anything contained in clause (z)(2), above, to the contrary, *** shall not be required to *** required to *** until on or after *** -11- - -------------------------------------- * CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED BY MEANS OF MARKING SUCH PORTIONS WITH AN ASTERISK (THE "MARK"). THIS EXHIBIT HAS BEEN FILED WITH THE SECRETARY OF THE COMMISSION WITHOUT THE MARK PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. *** unless *** agrees to *** solely *** reasonably approved by *** provided, however, that should *** desire to *** from third parties, *** shall *** for all *** invoiced prior to *** in an amount *** from a third party and *** for such *** in the prior *** provided further, however, that *** shall not be required to *** for any *** during this period *** as provided pursuant to the Requirements Document. The termination by *** of this Agreement with respect to *** as set forth in this Section 6.2(a) shall not in any way *** pursuant to the terms set forth herein and in Sections 2.2(a) and (b) of the Licensing Agreement. (b) Subject to the provisions of Section 6.6, this Agreement may be terminated by *** with respect to *** if *** fails to *** at least *** and *** in any *** Such termination shall not be effective until *** has provided *** with written notice thereof. The termination by *** of this Agreement with respect to *** as set forth in this Section 6.2(b) shall not in any way *** pursuant to the terms set forth herein and in Section 2.2(a) of the Licensing Agreement. -12- - -------------------------------------- * CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED BY MEANS OF MARKING SUCH PORTIONS WITH AN ASTERISK (THE "MARK"). THIS EXHIBIT HAS BEEN FILED WITH THE SECRETARY OF THE COMMISSION WITHOUT THE MARK PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 6.3. TERMINATION BY ***. Subject to the provisions of Section 6.6, this Agreement may be terminated by *** with respect to *** at any time after the *** of this Agreement *** upon the giving of *** to *** (the *** and the effective date of the termination of this Agreement shall be the date specified in the *** Upon receipt of *** shall, without delay, *** as appropriate and as permitted, all matters affected by or resulting from *** but *** and *** shall *** under this Agreement in accordance with the terms thereof. In the event of such termination, *** shall provide such reasonable *** as may be reasonably necessary to *** as appropriate, from *** or a third party *** and *** shall *** all of *** reasonable *** in connection therewith. The termination by *** of this Agreement with respect to *** shall not in any way limit *** pursuant to the terms set forth in Section 2.2(a) of the Licensing Agreement. 6.4. TERMINATION FOR INSOLVENCY. If either Dura or Lilly (i) makes a general assignment for the benefit of creditors or becomes insolvent; (ii) files an insolvency petition in bankruptcy; (iii) petitions for or acquiesces in the appointment of any receiver, trustee or similar officer to liquidate or conserve its business or any substantial part of its assets; (iv) commences under the laws of any jurisdiction any proceeding involving its insolvency, bankruptcy, reorganization, adjustment of debt, dissolution, liquidation or any other similar proceeding for the release of financially distressed debtors; or (v) becomes a party to any proceeding or action of the type described above in (iii) or (iv) and such proceeding or action remains undismissed or unstayed for a period of more than sixty (60) days, then the other party may by written notice terminate this Agreement in its entirety with immediate effect. -13- - -------------------------------------- * CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED BY MEANS OF MARKING SUCH PORTIONS WITH AN ASTERISK (THE "MARK"). THIS EXHIBIT HAS BEEN FILED WITH THE SECRETARY OF THE COMMISSION WITHOUT THE MARK PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 6.5. TERMINATION FOR DEFAULT. (a) Dura and Lilly shall each have the right to terminate this Agreement with respect to a specific Product for default upon the other's failure to comply in any material respect with the terms and conditions of this Agreement that relate to such specific Product. At least ninety (90) days prior to any such termination for default the party seeking to so terminate shall give the other written notice of its intention to terminate this Agreement in accordance with the provisions of this Section 6.5, which notice shall set forth the default(s) which form the basis for such termination. If the defaulting party fails to correct such default(s) within ninety (90) days after the receipt of notification, or if the same reasonably cannot be corrected or remedied within ninety (90) days, then if the defaulting party has not commenced curing said default(s) within said ninety (90) days and be diligently pursuing completion of same, then such party immediately may terminate this Agreement with respect to such Product. In addition, any default by a party under the Licensing Agreement shall be deemed to be a default by such party hereunder. (b) This Section 6.5 shall not be exclusive and shall not be in lieu of any other remedies available to a party hereto for any default hereunder on the part of the other party. (c) Notwithstanding anything herein to the contrary, if *** terminates this Agreement pursuant to Section 6.5(a), then *** shall be required to (x) *** as may be necessary to enable *** the *** as appropriate, *** and (y) effect the *** for the *** -14- - -------------------------------------- * CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED BY MEANS OF MARKING SUCH PORTIONS WITH AN ASTERISK (THE "MARK"). THIS EXHIBIT HAS BEEN FILED WITH THE SECRETARY OF THE COMMISSION WITHOUT THE MARK PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. *** as appropriate, from *** to *** or a third party *** designated by *** for which *** shall *** for all of *** in connection therewith. Notwithstanding anything contained in clause (y), above, to the contrary, *** shall not be required to *** required to *** until on or after *** unless *** agrees to *** solely *** in a *** reasonably *** provided, however, that should *** desire to *** shall *** for *** invoiced prior to *** in an amount *** third party *** in the *** provided further, however, that *** shall not be required to *** for any *** during this period in *** of the *** reflected in *** as provided pursuant to the Requirements Document. 6.6. CONTINUING OBLIGATIONS. Termination of this Agreement for any reason shall not relieve the parties of any obligation accruing prior thereto with respect to the terminated Product and any ongoing obligations hereunder with respect to the remaining Product and shall be without prejudice to the rights and remedies of either party with respect to any antecedent breach of the provisions of this Agreement. Without limiting the generality of the foregoing, no termination of this Agreement, whether by lapse of time or otherwise, shall serve to terminate the obligations of the parties hereto under subsections 2.3, 2.4, 2.5, 2.6, 3.2, 3.3, 3.4, 4.3, 5.1, 5.2, 6.2, 6.5, 6.6, and 6.7, section 7, section 8 (except for subsection 8.14, which shall expire as described therein) hereof, and such obligations shall survive any such termination. -15- - -------------------------------------- * CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED BY MEANS OF MARKING SUCH PORTIONS WITH AN ASTERISK (THE "MARK"). THIS EXHIBIT HAS BEEN FILED WITH THE SECRETARY OF THE COMMISSION WITHOUT THE MARK PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 6.7. RETURNED MATERIALS. On the termination of this Agreement, Lilly and Dura each shall return to the other all information which it possesses or controls that belongs to the other, except that each may retain a copy for recordkeeping purposes. SECTION 7 RESTRICTIVE COVENANTS 7.1. NON-COMPETE. For and during the period *** and, if *** pursuant to *** for the period ending on the *** (the *** neither *** shall, directly or indirectly, *** on (unless such *** are *** or *** an *** provided, however, that nothing set forth herein shall prevent *** from (a) *** (b) *** or (c) subject to the following sentence, *** which at the time of *** Notwithstanding the above, *** acknowledges and agrees that the following activities, events and conditions *** of this Section 7.1 and *** in any *** or *** of any nature whatsoever (each, a *** in which the other *** in such *** (each, the *** at that time already conducts or engages in, directly or indirectly, anywhere *** the *** (the *** provided that the *** (i) *** a *** of the *** of the *** -16- - -------------------------------------- * CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED BY MEANS OF MARKING SUCH PORTIONS WITH AN ASTERISK (THE "MARK"). THIS EXHIBIT HAS BEEN FILED WITH THE SECRETARY OF THE COMMISSION WITHOUT THE MARK PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. *** prior to the *** (ii) will not constitute a *** of the *** of either *** or *** as the case may be, following *** and (iii) would not have a *** Further, no provision herein contained shall *** in any fashion *** to conduct or engage in *** 7.2. CONFIDENTIALITY. Confidentiality of information shall be provided under and pursuant to and in accordance with the terms of Section 7.5 of the Licensing Agreement, which terms are by this reference incorporated in and made a part of this Agreement, and all of which for purposes of this Agreement shall survive any termination or expiration of the Licensing Agreement. SECTION 8 MISCELLANEOUS PROVISIONS 8.1. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; PROVIDED, HOWEVER, that neither Lilly nor Dura may assign any of its rights, duties or obligations hereunder without the prior written consent of the other, which consent may be withheld in the other's sole discretion, except that no prior written consent shall be required (i) in the event that a third party acquires substantially all of the assets or outstanding shares of, or merges with, Dura or Lilly, as the case may be, or (ii) in the event Lilly assigns any or all of its obligations hereunder to an Affiliate of Lilly or a third party but only so long as Lilly agrees to be bound by all of its responsibilities and obligations hereunder. No assignment of this Agreement or of any rights hereunder shall relieve the assigning party of any of its obligations or liability hereunder. 8.2. NOTICES. All notices or other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand, prepaid telex, cable, telegram or facsimile and confirmed in writing, or mailed first class, postage prepaid, by -17- - -------------------------------------- * CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED BY MEANS OF MARKING SUCH PORTIONS WITH AN ASTERISK (THE "MARK"). THIS EXHIBIT HAS BEEN FILED WITH THE SECRETARY OF THE COMMISSION WITHOUT THE MARK PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. registered or certified mail, return receipt requested (mailed notices and notices sent by telex, cable or telegram shall be deemed to have been given on the date received) as follows: If to Lilly, as follows: Eli Lilly and Company Lilly Corporate Center Indianapolis, Indiana 46285 Facsimile: (317) 277-3354 Attn: President, North American Pharmaceutical Operations With a copy to: Eli Lilly and Company Lilly Corporate Center Indianapolis, Indiana 46285 Facsimile: (317) 276-6221 Attn: General Counsel If to Dura, as follows: Dura Pharmaceuticals, Inc. 5880 Pacific Center Boulevard San Diego, California 92121-4204 Attn: Office of the General Counsel or in any case to such other address or addresses as hereafter shall be furnished as provided in this Section 8.2 by any party hereto to the other party. 8.3. WAIVER; REMEDIES. No delay on the part of Lilly or Dura in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of either Lilly or Dura of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. The indemnification provided in Section 8 of the Licensing Agreement shall be the sole remedy available for any Damages arising out of or in connection with this Agreement except for any rights or remedies which the parties hereto may otherwise have in equity. -18- 8.4. ENTIRE AGREEMENT. This Agreement (together with the Licensing Agreement) and its appendices constitute the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements or understandings of the parties relating thereto. 8.5. AMENDMENT. This Agreement may be modified or amended only by written agreement of the parties hereto. 8.6. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute a single instrument. 8.7. GOVERNING LAW. This Agreement shall be governed and construed in accordance with the laws of the State of Indiana excluding any choice of law rules which may direct the application of the law of another state. 8.8. CAPTIONS. All section titles or captions contained in this Agreement and in any appendix referred to herein or annexed to this Agreement are for convenience only, shall not be deemed a part of this Agreement and shall not affect the meaning or interpretation of this Agreement. 8.9. NO THIRD-PARTY RIGHTS. No provision of this Agreement shall be deemed or construed in any way to result in the creation of any rights or obligation in any Person not a party to this Agreement. 8.10. CONSTRUCTION. This Agreement shall be deemed to have been drafted by both Lilly and Dura and shall not be construed against either party as the draftsperson hereof. 8.11. APPENDICES. Each Appendix hereto is incorporated by reference and made a part of this Agreement. 8.12. NO JOINT VENTURE. Nothing contained herein shall be deemed to create any joint venture or partnership between the parties hereto, and, except -19- as is expressly set forth herein, neither party shall have any right by virtue of this Agreement to bind the other party in any manner whatsoever. 8.13. SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective while this Agreement remains in effect, the legality, validity and enforceability of the remaining provisions shall not be affected thereby. 8.14. FORCE MAJEURE. If either party is prevented from complying, either totally or in part, with any of the terms or provisions set forth herein with respect to either one or both of the Products by reason of force majeure, including, by way of example and not of limitation, fire, flood, explosion, storm, strike, lockout or other labor dispute, riot, war, rebellion, accidents, acts of God, acts of governmental agencies or instrumentalities, failure of suppliers or any other cause or externally induced casualty beyond its reasonable control, whether similar to the foregoing contingencies or not, said party shall provide written notice of same to the other party. Said notice shall be provided within five (5) working days of the occurrence of such event and shall identify the requirements of this Agreement or such of its obligations as may be affected, and to the extent so affected, said obligations shall be suspended during the period of such disability. If any raw materials, facility systems or capacity is used for both the affected Product and any other products or purposes, any necessary allocation shall be made as between Lilly's needs (including those of any Affiliate of Lilly), Dura's needs and the needs of any other party to whom Lilly has firm contractual obligations on a basis no less favorable than pro rata on a volume basis. The party prevented from performing hereunder shall use reasonable efforts to remove such disability, and shall continue performance whenever such causes are removed. The party so affected shall give to the other party a good faith estimate of the continuing effect of the force majeure condition and the duration of the affected party's nonperformance. If the period of any previous actual nonperformance of Lilly because of Lilly force majeure conditions plus the anticipated future period of Lilly nonperformance because of such conditions will exceed an aggregate of two hundred seventy (270) days within any twenty-four (24) month period, Dura may terminate this Agreement by notice to Lilly. If the period of any previous actual nonperformance of Dura -20- because of Dura force majeure conditions plus the anticipated future period of Dura nonperformance because of such conditions will exceed an aggregate of two hundred seventy (270) days within any twenty-four (24) month period, Lilly may terminate this Agreement by notice to Dura. When such circumstances as those contemplated herein arise, the parties shall discuss in good faith, what, if any, modification of the terms set forth herein may be required in order to arrive at an equitable solution. [End of text] -21- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. ELI LILLY AND COMPANY By: /s/ Sidney Taurel Title: President and Chief Operating Officer DURA PHARMACEUTICALS, INC. By: /s/ Cam L. Garner Title: Chairman, President and Chief Executive Officer Dura/Manufacturing Agreement-8/20/96 -22- MANUFACTURING AGREEMENT EXHIBIT A PRODUCTS
PRODUCT CONTAINER FULL LOT MANUFACTURING/ LILLY NDA NO. TITLES COUNT/SIZE QUANTITIES PACKAGING PRODUCT SITE ITEM CODE - -------------------------------------------------------------------------------------------------------------------- Ceclor CD Bottles of 60 12,670 Lilly Industries TA4220 50-673 375mg Carolina, PR PR03 - -------------------------------------------------------------------------------------------------------------------- Ceclor CD Blister of 4 142,500 Lilly Dry Products TA4221 50-673 500mg (sample) Indianapolis, IN Bldg 328 - -------------------------------------------------------------------------------------------------------------------- Ceclor CD Bottles of 60 9,500 Lilly Industries TA4221 50-673 500mg Carolina, PR PR03 - -------------------------------------------------------------------------------------------------------------------- Keftab Blister of 4 **** Lilly Dry Products TA4143 50-614 500mg (sample) Indianapolis, IN Bldg 328 - -------------------------------------------------------------------------------------------------------------------- Keftab Bottles of 5,640 Lilly Industries TA4143 50-614 500mg 100 Carolina, PR PR03 - --------------------------------------------------------------------------------------------------------------------
- -------------------------------------- * CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED BY MEANS OF MARKING SUCH PORTIONS WITH AN ASTERISK (THE "MARK"). THIS EXHIBIT HAS BEEN FILED WITH THE SECRETARY OF THE COMMISSION WITHOUT THE MARK PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. EXHIBIT B EXISTING INVENTORY AND SAMPLES SAMPLES 1. *** shall *** an aggregate of (a) *** Samples of Keftab (500 mg 2 x 2 Samples), and (b) *** Samples of Ceclor CD (*** x 2 Samples). 2. Subject to the provisions set forth in Section 4 of the Requirements Document, *** with the following initial quantities of samples: (a) *** sample units of Keftab, and (b) *** sample units of Ceclor CD. These samples shall be *** consistent with No. 1 above. 3. *** sample units of Ceclor CD at a purchase price equal to *** per sample unit. Lilly shall invoice Dura for Dura's purchase of these samples in accordance with the provisions contained in the Manufacturing Agreement. 4. Dura shall designate on any Purchase Order for samples: (a) the amount of Keftab and/or Ceclor CD samples, as appropriate, which are to be *** and (b) the amount of Keftab and/or Ceclor CD samples, as appropriate, which are to be *** in accordance under this Agreement. 5. In no event shall *** aggregate samples of Keftab and *** aggregate samples of Ceclor CD hereunder. INVENTORY 1. *** (a) that quantity of Keftab trade bottles equal to (i) the *** bottles of inventory as of *** less (ii) the number of bottles *** at a purchase price equal to *** per bottle; and (b) *** bottles of Ceclor CD *** tablets and *** bottles of Ceclor CD *** tablets at a purchase price equal to *** per bottle and *** per bottle, respectively. 2. Lilly shall invoice Dura for Dura's purchase of the above Products in accordance with the provisions contained in the Manufacturing Agreement. -2- - -------------------------------------- * CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED BY MEANS OF MARKING SUCH PORTIONS WITH AN ASTERISK (THE "MARK"). THIS EXHIBIT HAS BEEN FILED WITH THE SECRETARY OF THE COMMISSION WITHOUT THE MARK PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 3 EXHIBIT C PRICES OF PRODUCTS AND SAMPLES (a) *** will be invoiced at the following prices: Product Price ------- ----- Ceclor CD *** Bottles of 60 Tablets *** *** Bottles of 60 Tablets *** Keftab 500 mg Bottles of 100 Tablets *** (b) *** will be invoiced at the following prices: Keftab 500 mg 2 x 2 Samples *** per Sample Ceclor CD *** 2 x 2 Samples *** per Sample (c) Beginning *** and on *** shall *** the *** in *** for such presentations (determined in accordance with *** consistently applied), but in no case *** for any Product (including samples of Product) *** shall give *** notice on or before *** of any and all *** with said *** to be effective *** received after *** of the *** (d) Any modifications or adjustments to any of the prices set forth on this Exhibit C for reasons other than those described in paragraph (c), above, shall be evidenced in writing and be executed by an authorized representative of each party. - -------------------------------------- * CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED BY MEANS OF MARKING SUCH PORTIONS WITH AN ASTERISK (THE "MARK"). THIS EXHIBIT HAS BEEN FILED WITH THE SECRETARY OF THE COMMISSION WITHOUT THE MARK PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. APPENDIX A LILLY * DURA MANUFACTURING REQUIREMENTS DOCUMENT CECLOR-Registered Trademark- CD AND KEFTAB-Registered Trademark- PRODUCTS (Revision No. O, , 1996) --- SECTION 1 INTRODUCTION 1.0. This Manufacturing Requirements Document ("MRD") describes certain procedures, personnel contacts and other matters relating to the manufacturing and supplying of Products by Lilly to Dura. Capitalized terms used in this MRD and not otherwise defined herein shall have the meanings ascribed to such terms in the Manufacturing Agreement to which this MRD is attached as Appendix A. The Products covered by this document are listed in ATTACHMENT I. Throughout this document, references are made to individuals from Dura and Lilly by title. Refer to the Key Contacts list, ATTACHMENT II, to obtain the name and phone number of the individual. SECTION 2 ADMINISTRATION 2.0. Revisions shall be coordinated by one Lilly employee and one Dura employee. These two individuals will have responsibility for alerting any affected persons within their respective companies and for coordinating any required implementation. Each change in this MRD may be made only by the designated representatives set forth below and will cause a change in the revision number reflected on the cover page of this document. Lilly will maintain the master copy and make the agreed upon changes. A new revision will then be sent to Dura. The designated Dura representative will acknowledge receipt and acceptance of such new revision by sending a memo to the designated Lilly representative. The designated representatives are: Lilly: Jaime Colon Dura: Jeff Doerner Either company may change its designated representative by giving notice thereof to the other in accordance with the provisions of the Manufacturing Agreement. These contacts from Lilly and Dura will be the primary contacts for any questions or requests that either party might have with this MRD or the Products. SECTION 3 QUALITY ASSURANCE/REGULATORY REQUIREMENTS 3.1. INCOMING COMPONENT INSPECTIONS. Lilly has and will maintain standard operating procedures ("SOPs") for inspections of all components used in the manufacture of the Products. Incoming raw material, actives, and components as well as finished goods are included in the inspection program. Inspections shall be conducted in accordance with approved/validated methods and Specifications. Documentation of all inspections shall be maintained per procedure. Access to Lilly's SOPs shall be made available by Lilly to Dura upon Dura's reasonable request. 3.2. ANNUAL REVIEWS. Lilly will perform annual Product quality reviews for all Products produced at its manufacturing sites. An annual Product quality review report will be created for each calendar year, including information concerning batches produced, complaints, rejections, investigations, recalls, quality, analytical, microbiological and stability data as applicable. Access to such reports shall be made available by Lilly to Dura upon Dura's reasonable request. 3.3. STABILITY. Lilly will perform stability testing required to support the NDAs and ongoing commercial stability monitoring of the Products. Stability testing and monitoring will be conducted following Lilly-approved protocols in the approved NDAs. 3.4. BATCH DOCUMENTATION & QUALITY RECORDS. Lilly will maintain original batch documentation in a secure Lilly facility for a period of three (3) years after the expiry of the expiration dating of the applicable Products. All documentation is and will be reviewed by Lilly Quality Control for adherence to internal procedures, GMPs and the approved NDAs. -2- After any Product release, a Certificate of Analysis will be sent by overnight mail or by telecopy (receipt confirmed) to arrive at Dura prior to such Product's delivery, addressed to Attention: Quality Assurance. A copy of the MSDS documents are included as ATTACHMENT III to this document. 3.5. RESERVE SAMPLES. Lilly will maintain reserve samples to comply with the Code of Federal Regulations 21 CFR 211.170 for the Products. Samples from Product lots tested for release at Lilly facilities will be maintained in a secure Lilly storage facility consistent with the storage conditions for the Products. 3.6. MATERIAL CONTROL. Control and traceability of all materials used in the manufacture of the Products will be accomplished by adherence to internal SOPs. 3.7. NON-CONFORMING OR REJECTED MATERIAL. In process and finished Products considered unacceptable by Lilly Quality Control will be rejected by Lilly Quality Control in accordance with internal SOPs which have been established and will be maintained by Lilly. These Products will be identified as unsuitable for use and segregated from approved material with the appropriate investigation reports and labeling pursuant to such SOPs. 3.8. DESTROY ORDER SYSTEM. There is a formal system, which has been established and will be maintained by Lilly, by which obsolete material is destroyed and the destruction documented. Access to destruction documentation related to Products shall be made available by Lilly to Dura upon Dura's request. Material for which Dura is financially responsible will not be destroyed until at least ten (10) days after Lilly has provided notice of the proposed destruction to the designated Key Contact from Dura. 3.9. LABORATORY ANALYSIS. Lilly will test Products using approved/validated methods and Specifications according to the approved NDAs. There is a procedure in place, which Lilly will maintain, for investigation and disposition of out-of-Specifications or abnormal testing results. -3- 3.10. TRAINING/QUALIFICATION. Lilly has and will maintain a program to assure that all personnel engaged in the manufacturing, filling, packaging, and shipping of Products have the education, training and/or experience required to properly perform their assigned functions in compliance with GMPs. Training of all personnel is and shall be documented by Lilly. 3.11. DEVIATIONS. Lilly has and will maintain formal procedures for notifying appropriate Lilly personnel, including management, and performing investigations in connection with deviations relating to the manufacture, processing, packaging, testing or storage of the Products. These procedures define the criteria and process by which all deviations relating to the manufacture, processing, packaging, labeling, testing or storage of the Products, including those which may affect safety, identity, strength, efficacy, quality or purity, are to be evaluated, justified, documented and approved. 3.12. REGULATORY REQUIREMENTS. Dura and Lilly have jointly developed written procedures for (i) the reporting of adverse drug experiences, as set forth on EXHIBIT D to the Licensing Agreement, (ii) the submission by Dura to Lilly and by Lilly to FDA of labeling and promotional materials related to the Products as set forth in EXHIBIT E to the Licensing Agreement, (iii) administration of and response to medical inquiries concerning the Products by consumers, physicians, pharmacists and other health care professionals as set forth in EXHIBIT F to the Licensing Agreement, and (iv) administration and analysis of and response to complaints concerning the Products as set forth in EXHIBIT G to the Licensing Agreement. Dura and Lilly shall each comply with the provisions thereof. SECTION 4 INVENTORY POLICY & MATERIAL PLANNING 4.0. Lilly's and Dura's goals include a continuing effort to reduce cycle time through the plant and through material and component acquisition to minimize inventory while responding fully to market demand. Attainment of this goal requires well developed channels of communication. This benefits both parties by reducing the investment in inventory. Because of the process flow inherent in the Products at the plant, schedule changes require advance planning. -4- - - Dura agrees that it cannot submit a purchase order hereunder for Keftab samples in excess of the quantity thereof set forth on Exhibit B to the Manufacturing Agreement unless such purchase order is submitted to Lilly in accordance with the terms set forth herein before the close of business on Friday, August 23, 1996. Dura further agrees and acknowledges that Lilly shall not be required to begin to process any purchase order pursuant to the terms set forth herein for any additional quantities of Keftab samples until after November 15, 1996. - - Dura agrees that it cannot submit a purchase order hereunder for Ceclor CD samples in excess of the quantity set forth on Exhibit B to the Manufacturing Agreement unless such purchase order is submitted to Lilly in accordance with the terms set forth herein before the close of business on Friday, August 23, 1996. Dura further agrees and acknowledges that Lilly shall not be required to begin to process any purchase order pursuant to the terms set forth herein for any additional quantities of Ceclor CD samples until after April 15, 1997; provided, however, that if Dura has submitted a purchase order in accordance with the terms set forth herein by the close of business on April 15, 1997, then Lilly shall deliver no more than one lot of Ceclor CD samples to Dura on or before June 15, 1997; provided further that any additional quantities of Ceclor CD samples shall be provided by Lilly to Dura in accordance with the terms set forth herein. - - On or before the 15th of each month, Dura shall provide Lilly with a rolling forecast (the "Forecast"), for which no binding purchase order exists, of its estimated requirements for each of the Products (including, without limitation, samples thereof) for each of the next five (5) quarters. In addition, in December of each year Dura shall provide Lilly with a non-binding forecast of its estimated requirements for each of the Products (including, without limitation, samples thereof) for the next thirty-six (36) months. - - Reasonable quantities of unique components, or materials that are not used in the manufacture of Lilly's other products, will be purchased by Lilly in reliance by Lilly on Dura's Forecast of its estimated -5- requirements. If Dura thereafter requests any change that causes any obsolescence of any such unique components or materials purchased by Lilly, Dura shall be responsible to Lilly for the costs associated with said components or materials (including, but not limited to, any costs related to the destruction of such components or materials). - - Dura shall purchase not less than 80% of the quantities identified in its most recent applicable quarterly Forecast and Lilly shall not be obligated to provide more than 120% of such quantities. An example of the foregoing is set forth in ATTACHMENT IV hereto. - - Purchase Orders will be issued from Dura to Lilly at least ninety (90) days prior to the delivery date specified in each Purchase Order. All Purchase Orders shall be for full lot quantities (as set forth on ATTACHMENT I hereto); delivery of greater than 90% of the quantity ordered shall be accepted by Dura in full satisfaction of the quantity ordered in such Purchase Order. - - Lead times on copy code changes (not reprints of approved labeling) from receipt of Dura's approval of the proposed copy code shall be: Labels 8 weeks Literature 8 weeks Cartons 9 weeks Shipping Cases 4 weeks - - Lead time for product packaging is in addition to the lead time set forth for the above-described copy code changes. -6- SECTION 5 SHIPMENT OF FINISHED GOODS 5.0. A copy of the bill of lading will be included as shipping paperwork with each order. Dura will select and pay the carrier to be used. These Products will be shipped F.O.B. shipping point, freight class, Class 70 (Class of Commodity for Food and Pharmaceutical Products) or as may otherwise be required pursuant to Applicable Laws. Should Dura request Lilly to warehouse any Product, Lilly will use reasonable efforts to comply, and Dura shall pay to Lilly a warehousing fee per pallet per day of Two Dollars Fifty Cents ($2.50). Any discrepancies between quantity shipped from Lilly and quantity arriving at Dura shall be jointly investigated. SECTION 6 PACKAGE DESIGN 6.0. Initial package design for Product samples and trade shall be provided by Lilly. This procedure encompasses all changes in the design of packaging (see section titled "Control of Printed Material" for graphic changes): - Lilly will assign a unique item number for each packaging component and a detailed specification. - Dura will supply label designs to Lilly for artwork creation and ordering of package components. - Lilly requires a unique pharmacode on each primary label. This assignment will be contained in the detailed specification. The pharmacode is intended to be scanned at the printing supplier and on -7- the packaging lines to ensure that the correct label is being used. The pharmacode will be put in position by Lilly. - In general, minor changes to secondary packaging may be made without the review process if the change is considered to be functionally equivalent or unnoticed by the end user. An example might be a change in paper weight or fold in the prescribing information to improve packaging efficiency (assuming no corresponding graphic change is required in a fold change). Specifications and component sheets will be revised, as appropriate. SECTION 7 ADDRESSES 7.0. Purchase Orders should be placed and forecasts sent as follows: Orders and forecasts should be mailed to: Eli Lilly Industries, Inc. Call Box 1198 Pueblo Station Carolina, Puerto Rico 00986-1198 Attn: Customer Services, PR03 and a copy of any forecast should be mailed to: Eli Lilly and Company 1400 West Raymond Street Drop Code 4028 Attn: Inventory Planner Indianapolis, IN 46221 At the time the Purchase Order is mailed, a copy should be faxed to Lilly Customer Service Representative, FAX (787)257-5823. Once Products are shipped, Lilly will invoice Dura. Invoice will reference Dura Purchase Order, quantity, description, price, and shipping document number. -8- Invoices will be mailed to: Dura Pharmaceuticals, Inc. 5880 Pacific Center Boulevard San Diego, California 92121-4204 Attn: Finance Department SECTION 8 CONTROL OF PRINTED MATERIAL 8.0. Dura will supply label designs to Lilly. Lilly will prepare final artwork and printer's proofs for initial approval by: Lilly's Regulatory Affairs Group, CM&C Regulatory Group, and Printed Package Materials Groups, and by Dura's Regulatory/Medical Affairs/Marketing Group. Lilly will then forward these proofs to the attention of Dura's Vice President of Regulatory Affairs. Following receipt of proof approval from Dura, Lilly will have labeling components printed in accordance with SOPs for graphics preparation and processing printing orders. Any revisions to approved labeling will be requested by Dura to Lilly's Regulatory Affairs Group. Lilly will prepare final artwork and printer's proofs for approval by: Lilly's Regulatory Affairs Group, CM&C Regulatory Group, and Printed Package Materials Groups and by Dura's Regulatory/Medical Affairs/Marketing Group. Lilly will then forward these proofs to the attention of Dura's Vice President of Regulatory Affairs. Following receipt of proof approval from Dura, Lilly will have labeling components printed in accordance with SOPs for graphics preparation and processing printing orders. Dura approval shall not be required for reprints of currently approved labeling with no revisions. SECTION 9 PROCESS CHANGE AND VALIDATION 9.0. Lilly has and will maintain procedures that help it determine if process changes are occurring and guide it in administering process changes. The current Product Specifications are included in ATTACHMENT V. If Dura requests a change in Specifications, packaging, process or any other matters -9- covered by this MRD, Lilly will determine the steps necessary and the costs associated to accomplish the change and will communicate that information to Dura. Upon Dura's acceptance of responsibility for the costs of such change and such other conditions as may be reasonably necessary for Lilly to accomplish the change (including lead time), Lilly will make such change. If Lilly desires any such change, it shall follow a reciprocal procedure with Dura. If, in Lilly's reasonable belief, any process change would result in a material change in a Product's appearance, lot size (whether trade or sample), or inventory level, Lilly shall provide Dura with at least ten (10) business days notice before implementing such change. Whenever this MRD refers to "Standard operating procedures" or "SOPs" or "programs" that Lilly "has and will maintain", such phrases or phrases of similar import shall be deemed to mean that Lilly shall, throughout the term of the Manufacturing Agreement, have and maintain the referenced procedures or programs as they may be modified from time to time in Lilly's discretion without the need for notice to, or the consent of, Dura; provided, however, that Lilly shall upon Dura's reasonable request make such procedures or programs, as so modified, available for review by Dura. SECTION 10 PRICING 10.0. Products shall be purchased by Dura from Lilly pursuant to the terms and conditions set forth in Section 2 of the Manufacturing Agreement and at the prices set forth on Exhibit C thereto (a copy of which is attached hereto as ATTACHMENT VI). If any prices are adjusted pursuant to the terms contained in Exhibit C, then such revised exhibit shall be attached hereto as a revised ATTACHMENT VI. -10- ATTACHMENT I PRODUCTS PRODUCT CONTAINER FULL LOT MANUFACTURING/ LILLY NDA NO. TITLES COUNT/SIZE QUANTITIES PACKAGING PRODUCT SITE ITEM CODE - -------------------------------------------------------------------------------- Ceclor CD Bottles of 12,670 Lilly Industries TA4220 50-673 375mg 60 Carolina, PR PR03 - -------------------------------------------------------------------------------- Ceclor CD Blister of 4 142,500 Lilly Dry Products TA4221 50-673 500mg (sample) Indianapolis, IN Bldg 328 - -------------------------------------------------------------------------------- Ceclor CD Bottles of 9,500 Lilly Industries TA4221 50-673 500mg 60 Carolina, PR PR03 - -------------------------------------------------------------------------------- Keftab Blister of 4 **** Lilly Dry Products TA4143 50-614 500mg (sample) Indianapolis, IN Bldg 328 - -------------------------------------------------------------------------------- Keftab Bottles of 5,640 Lilly Industries TA4143 50-614 500mg 100 Carolina, PR PR03 - -------------------------------------------------------------------------------- - -------------------------------------- * CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED BY MEANS OF MARKING SUCH PORTIONS WITH AN ASTERISK (THE "MARK"). THIS EXHIBIT HAS BEEN FILED WITH THE SECRETARY OF THE COMMISSION WITHOUT THE MARK PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ATTACHMENT II KEY CONTACT LIST
NAME TITLE ROLE DEPT. LOCATION TELEPHONE MAIL FAX NUMBER DROP CODE - --------------------------------------------------------------------------------------------------------------------------------- LILLY PUERTO RICO *** *** *** 41J PR03 *** PR03 *** *** *** *** 50J PR03 *** PR03 *** *** *** *** 72J PR03 *** PR03 *** *** *** *** 72J PR03 *** PR03 *** *** *** *** 72J PR03 *** PR03 *** *** *** *** 43J PR03 *** PR03 *** *** *** *** 73J PR03 *** PR03 *** *** *** *** 43J PR03 *** PR03 *** *** *** *** 50J PR03 *** PR03 *** LILLY INDIANAPOLIS *** *** *** IC241 170/01 *** 4112 *** *** *** *** MC327 74/10 *** 1102 *** *** *** *** MC675 15/4 *** 2543 *** *** *** *** MC216 74/5 *** 1056 ***
- -------------------------------------- * CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED BY MEANS OF MARKING SUCH PORTIONS WITH AN ASTERISK (THE "MARK"). THIS EXHIBIT HAS BEEN FILED WITH THE SECRETARY OF THE COMMISSION WITHOUT THE MARK PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ATTACHMENT II KEY CONTACT LIST
NAME TITLE ROLE DEPT. LOCATION TELEPHONE MAIL FAX NUMBER DROP CODE - --------------------------------------------------------------------------------------------------------------------------------- DURA To be provided by Dura
ATTACHMENT III MATERIAL SAFETY DATA SHEETS MSDS Eli Lilly & Company Material Safety Data Sheet Lilly Corporate Center, Indianapolis, Indiana 46285 NAME: Cephalexin Hydrochloride Tablets DATE: May 12, 1993 - ------------------------------Section 1 - MATERIAL IDENTIFICATION--------------- U.S. TELEPHONE NUMBERS: EMERGENCY 317-276-2000 CHEMTREC 800-424-9300 As of the date of issuance, we are providing available information relevant to the handling of this material in the workplace. All information contained herein is offered with the good faith belief that it is accurate. THIS MATERIAL SAFETY DATA SHEET SHALL NOT BE DEEMED TO CREATE ANY WARRANTY OF ANY KIND (INCLUDING WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE). In the event of an adverse incident associated with this material, this safety data sheet is not intended to be a substitute for consultation with appropriately trained personnel. Nor is this safety data sheet intended to be a substitute for product literature which may accompany the finished product. See attached glossary for abbreviations. Common Name: Cephalexin Hydrochloride Tablets Lilly Nos.: TA4142, TA4143, TA4145 Chemical Name: 7-(D-2-Amino-2-phenylacetamido)-3-methyl-3-cephem-4-carboxylic acid hydrochloride monohydrate; 5-Thia-1-azabicyclo[4.2.0]oct-2- ene-2-carboxylic acid, 7-[(aminophenylacetyl)amino]-3-methyl-8- oxo-, monohydrochloride, monohydrate, [6R-[6alpha, 7beta(R*)] ]- Synonyms/Trade Names: Cephalexin Hydrochloride; Cephalexin; Cephalexin Page 1 NAME: Cephalexin Hydrochloride Tablets DATE: May 12, 1993 - ----------------------Section 1 - MATERIAL IDENTIFICATION (continued)----------- Hydrochloride Tablet Mix; Cephalexin Hydrochloride Core Tablets; Keftab*; Keftab Tablets*; LSN061188 Formulation; 4142; 4143 Mixture Ingredients Listed Below: Percent in Common or Chemical Name Synonyms/Trade Names CAS Number Mixture - ------------------------ -------------------- ---------- ---------- Cephalexin hydrochloride Keftab* 105879-42-3 44-97 Excipients NA NA 3-55 Contains no hazardous components (one percent or greater) or carcinogens (one- tenth percent or greater) not listed above. *Trademark of Eli Lilly and Company - --------------------------------------Section 2 - PHYSICAL DATA----------------- Appearance: White to off-white powder finished as coated tablets Odor: Odorless Boiling Point: NA Melting Point: NAIF Specific Gravity: NAIF pH: NAIF Evaporation Rate: NAIF Page 2 NAME: Cephalexin Hydrochloride Tablets DATE: May 12, 1993 - ------------------------------Section 2 - PHYSICAL DATA (continued)------------- Solubility in Water: Soluble Vapor Density: NAIF Vapor Pressure: NAIF - ----------------------------Section 3 - FIRE AND EXPLOSION INFORMATION---------- Extinguishing Media: Use water, carbon dioxide, dry chemical, foam, or Halon. Unusual Fire and Explosion Hazards: None known. Flash Point: NAIF Method: NA UEL: NAIF LEL: NAIF - --------------------------------Section 4 - REACTIVITY INFORMATION-------------- Stability: Stable at normal temperatures and pressures. Incompatibility: May react with strong oxidizing agents (e.g., peroxides, permanganates, nitric acid, etc.). Hazardous Decomposition: May emit toxic fumes when heated to decomposition. Hazardous Polymerization: Will not occur. Page 3 NAME: Cephalexin Hydrochloride Tablets DATE: May 12, 1993 - ----------------------------Section 5 - HEALTH HAZARD INFORMATION--------------- HUMAN - OCCUPATIONAL Effects, Including Signs and Symptoms, of Exposure: Tablets are intended for human consumption under guidance of a physician. Tablets are not considered hazardous under normal handling procedures. Severe allergic reactions have been reported with occupational exposure to cephalosporins. Effects of exposure to powder used to make tablets may include rash, upper airway congestion, gastrointestinal upset, eye irritation or anaphylactic shock. Medical Conditions Aggravated By Exposure: Penicillin or cephalosporin hypersensitivity. Primary Route(s) of Entry: Inhalation and skin contact. Exposure Guidelines: PEL and TLV not established. LEG LESS THAN 100 micrograms/m3 TWA for 12 hours ANIMAL TOXICITY DATA SINGLE EXPOSURE Data for the active ingredient, cephalexin hydrochloride, are reported. Oral: Cephalexin hydrochloride - Rat, median lethal dose 5000 mg/kg, reduced activity, diarrhea. Skin: Cephalexin hydrochloride - Rabbit, 200 mg/kg, no deaths or toxicity. Inhalation: Cephalexin hydrochloride - Rat, 497.5 mg/m3 for one hour, no deaths. Skin Contact: Cephalexin hydrochloride - Rabbit, nonirritant Eye Contact: Cephalexin hydrochloride - Rabbit, irritant ANIMAL TOXICITY DATA REPEAT EXPOSURE No data are available for cephalexin hydrochloride. Toxicity data for cephalexin monohydrate are presented. Page 4 NAME: Cephalexin Hydrochloride Tablets DATE: May 12, 1993 - -----------------Section 5 - HEALTH HAZARD INFORMATION (continued)-------------- Target Organ Effects: Cephalexin monohydrate - None identified. Other Effects: Cephalexin monohydrate - Salivation and vomiting. Reproduction: Cephalexin monohydrate - No reproductive or developmental effects. Sensitization: Cephalexin monohydrate - NAIF Mutagenicity: Cephalexin monohydrate - Not mutagenic in bacterial cells. Carcinogenicity: No carcinogenicity data found. Not listed as carcinogenic by IARC, NCI/NTP, ACGIH, or OSHA. - ---------------------Section 6 - EMERGENCY AND FIRST AID PROCEDURES------------- Eyes: Hold eyelids open and flush with a steady, gentle stream of water for 15 minutes. See an ophthalmologist (eye doctor) or other physician immediately. Skin: Remove contaminated clothing and clean before reuse. Wash all exposed areas of skin with plenty of soap and water. Get medical attention if irritation develops. Inhalation: Move individual to fresh air. Get medical attention if breathing difficulty occurs. If not breathing, provide artificial respiration assistance (mouth-to-mouth) and call a physician immediately. Ingestion: Do not induce vomiting. Call a physician or poison control center. If available, administer activated charcoal (6-8 heaping teaspoons) with two to three glasses of water. Do not give anything by mouth to an unconscious person. Immediately transport to a medical care facility and see a physician. Page 5 NAME: Cephalexin Hydrochloride Tablets DATE: May 12, 1993 - ----------------------------------Section 7 - HANDLING PRECAUTIONS-------------- Coated compressed tablets are not considered hazardous under normal handling procedures. The following are recommended for a production setting: Respiratory Protection: Use an approved respirator. Eye Protection: Chemical goggles and/or face shield. Ventilation: Laboratory fume hood or local exhaust ventilation. Other Protective Equipment: Chemical-resistant gloves and body covering to minimize skin contact. If handled in a ventilated enclosure, as in a laboratory setting, respirator and goggles or face shield may not be required. Safety glasses are always required. Other Handling Precautions: In production settings, airline-supplied, hood- type respirators are preferred. Shower and change clothing if skin contact occurs. - --------------------Section 8 - SPILL, LEAK, AND DISPOSAL PROCEDURES------------ Spills: Contain dry material by sweeping up or vacuuming. Vacuuming may disperse dust if appropriate dust collection filter is not part of the vacuum. Be aware of potential for dust explosion when using electrical equipment. Wear protective equipment, including eye protection, to avoid exposure (see Section 7 for specific handling precautions). Waste Disposal: Dispose of any cleanup materials and waste residue according to applicable federal, state, and local regulations. Page 6 NAME: Cephalexin Hydrochloride Tablets DATE: May 12, 1993 - ---------------------------------Section 9 - SHIPPING INFORMATION--------------- (Proper Shipping Name / Hazard Class / UN Number) DOT: Not regulated for surface transport. ICAO: Not regulated for air transport. IMO: Not regulated for water transport. - -------------------------------------------------------------------------------- For additional information call: Occupational Health and Safety Eli Lilly and Company 317-276-3494 For additional copies call: Customer Services Eli Lilly and Company 1-800-LILLY-Rx (1-800-545-5979) Page 7 GLOSSARY Abbreviations Used in Material Safety Data Sheets ACGIH = American Conference of Governmental Industrial Hygienists BEI = Biological Exposure Index CAS Number = Chemical Abstract Service Registry Number CERCLA = Comprehensive Environmental Response Compensation and Liability Act (of 1980) CHEMTREC = Chemical Transportation Emergency Center CWA = Clean Water Act DOT = Department of Transportation EP = Extraction Procedure as defined under RCRA Regulations EPA = Environmental Protection Agency HEPA = High Efficiency Particulate Air (Filter) HSDB = Hazardous Substance Data Base IARC = International Agency for Research on Cancer ICAO = International Civil Aviation Organization IMO = International Maritime Organization LEG = Lilly Exposure Guideline LEL = Lower Explosive Limit MSDS = Material Safety Data Sheet NA = Not Applicable, except in Section 9 where NA = North America NAIF = No Applicable Information Found NCI/NTP = National Cancer Institute/National Toxicology Program NIOSH = National Institute for Occupational Safety and Health NOS = Not Otherwise Specified OHS = Occupational Health Services OSHA = Occupational Safety and Health Administration PEL = Permissible Exposure Limit PSN = Proper Shipping Name RCRA = Resource Conservation and Recovery Act RTECS = Registry of Toxic Effects of Chemical Substances SARA = Superfund Ammendments and Reauthorization Act STEL = Short Term Exposure Limit TLV = Threshold Limit Value TSCA = Toxic Substances Control Act TWA = Time Weighted Average/8 Hours Unless Otherwise Noted UEL = Upper Explosive Limit UN = United Nations MSDS Eli Lilly & Company Material Safety Data Sheet Lilly Corporate Center, Indianapolis, Indiana 46285 NAME: Cefaclor Capsules and Tablets REVISED DATE: August 16, 1993 - ------------------------------Section 1 - MATERIAL IDENTIFICATION--------------- SECTIONS REVISED: Common Name, Identifiers, Section 1, 2, 3, 5, 7, 8 U.S. TELEPHONE NUMBERS: EMERGENCY 317-276-2000 CHEMTREC 800-424-9300 As of the date of issuance, we are providing available information relevant to the handling of this material in the workplace. All information contained herein is offered with the good faith belief that it is accurate. THIS MATERIAL SAFETY DATA SHEET SHALL NOT BE DEEMED TO CREATE ANY WARRANTY OF ANY KIND (INCLUDING WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE). In the event of an adverse incident associated with this material, this safety data sheet is not intended to be a substitute for consultation with appropriately trained personnel. Nor is this safety data sheet intended to be a substitute for product literature which may accompany the finished product. See attached glossary for abbreviations. Common Name: Cefaclor Capsules and Tablets Lilly Nos.: PU3060, PU3061, PU3062, QA252N, QA446J, TA4059, TA4074, TA4075, TA4220, TA4221, TA4222, UC5004, UC5005, UC5018, UC5368, UC5369, UC5902, UE0007, UE0008, UE0020, UE0021, VF0075, VF0078, VF0258, VF0259, VF0272, VF0277, VF0278, VF0307, VF0308, VF0309, VF0310, VF0325 Page 1 NAME: Cefaclor Capsules and Tablets REVISED DATE: August 16, 1993 - -------------------Section 1 - MATERIAL IDENTIFICATION (continued)-------------- Chemical Name: 5-Thia-1-azabicyclo [4.2.0] oct-2-ene-2-carboxylic acid, 7- [(aminophenylacetyl)amino]-3-chloro-8-oxo-, monohydrate, [(6R- [6alpha,7beta(R*)]]-; 3-Chloro-7-D-(2-phenylglycinamido)-3- cephem-4-carboxylic acid monohydrate Synonyms/Trade Names: Cefaclor; Cefaclor Capsule Mix; Cefaclor Capsules; Cefaclor Tablet Mix; Cefaclor Tablets; Cefaclor Convenient Dose Tablet; Cefaclor Extended Release Tablet; Cefaclor Chewable Tablet; Ceclor*; Ceclor CD*; Ceclor AF*; Ceclor Pulvules*; Ceclor Tablets*; LSN099638 Formulation; Panoral*; Panacef*; Kefral*; Alfatil*; Keflor*; Distaclor*; Kefolor*; Kefalor*; Ceclor*; 3061, 3062; 7250; 7500; Cefaclor MR; Cefaclor CD; Cefaclor AF; Alfatil Gelules; Alfatil LP; Kloclor; Kloclor BD Mixture Ingredients Listed Below: Percent in Common or Chemical Name Synonyms/Trade Names CAS Number Mixture - ----------------------- -------------------- ---------- ---------- Cefaclor Ceclor* 70356-03-5 13-92 Excipients NA NA 8-87 Contains no hazardous components (one percent or greater) or carcinogens (one- tenth percent or greater) not listed above. *Trademark of Eli Lilly and Company - ---------------------------------------Section 2 - PHYSICAL DATA---------------- Appearance: Capsules containing white to off-white powder or white to off- white powder finished as blue film-coated tablets Odor: Odorless Boiling Point: NA Melting Point: NA Specific Gravity: NA pH: NAIF Page 2 NAME: Cefaclor Capsules and Tablets REVISED DATE: August 16, 1993 - --------------------------------Section 2 - PHYSICAL DATA (continued)----------- Evaporation Rate: NAIF Solubility in Water: Slightly soluble Vapor Density: NAIF Vapor Pressure: NAIF - ------------------------Section 3 - FIRE AND EXPLOSION INFORMATION-------------- Extinguishing Media: Use water, carbon dioxide, dry chemical, foam, or Halon. Unusual Fire and Explosion Hazards: As a finely divided material, may form dust mixtures in air which could explode if subjected to an ignition source. May emit toxic chloride fumes when heated to decomposition. Flash Point: NAIF Method: NA UEL: NAIF LEL: NAIF - ------------------------------Section 4 - REACTIVITY INFORMATION---------------- Stability: Stable at normal temperatures and pressures. Incompatibility: May react with strong oxidizing agents (e.g., peroxides, permanganates, nitric acid, etc.). Hazardous Decomposition: May emit toxic chloride fumes when heated to decomposition. Hazardous Polymerization: Will not occur. Page 3 NAME: Cefaclor Capsules and Tablets REVISED DATE: August 16, 1993 - ----------------------------Section 5 - HEALTH HAZARD INFORMATION--------------- HUMAN - OCCUPATIONAL Effects, Including Signs and Symptoms, of Exposure: Capsules and tablets are intended for human consumption under guidance of a physician. Capsules and coated tablets are not considered hazardous under normal handling procedures. Effects of exposure to contents of capsule or powder used to make tablets may include eye irritation and allergic reactions. Based on prior experience with cephalosporin antibiotics, allergic reactions may include rash, nasal congestion, cough, dry throat, gastrointestinal upset, eye irritation, or anaphylactic shock. Medical Conditions Aggravated By Exposure: Penicillin or cephalosporin hypersensitivity. Primary Route(s) of Entry: Inhalation and skin contact. Exposure Guidelines: Cefaclor - PEL and TLV not established. LEG LESS THAN 100 micrograms/m3 TWA for 12 hours ANIMAL TOXICITY DATA SINGLE EXPOSURE Data for the active ingredient, cefaclor, are reported. Oral: Cefaclor - Rat, 5000 mg/kg, no deaths or toxicity. Monkey, 1000 mg/kg, no deaths, diarrhea. Skin: Cefaclor - Rabbit, 500 mg/kg, no deaths or toxicity. Inhalation: Cefaclor - Rat, 224 mg/m3 for one hour, no deaths or toxicity. Intraperitoneal: Cefaclor - Mouse, median lethal dose estimated greater than 5000 mg/kg, mortality. Skin Contact: Cefaclor - Rabbit, nonirritant Eye Contact: Cefaclor - Rabbit, slight irritant Page 4 NAME: Cefaclor Capsules and Tablets REVISED DATE: August 16, 1993 - --------------------Section 5 - HEALTH HAZARD INFORMATION (continued)----------- ANIMAL TOXICITY DATA REPEAT EXPOSURE Data for the active ingredient, cefaclor, are reported. Target Organ Effects: Cefaclor - Kidney effects (dilation of renal tubules). Other Effects: Cefaclor - Vomiting, soft stools, and reversible thrombocytopenia. Reproduction: Cefaclor - No reproductive or developmental effects. Sensitization: Cefaclor - Guinea pig, not a contact sensitizer. Mutagenicity: Cefaclor - NAIF Carcinogenicity: No carcinogenicity data found. Not listed as carcinogenic by IARC, NCI/NTP, ACGIH, or OSHA. - ---------------------Section 6 - EMERGENCY AND FIRST AID PROCEDURES------------- Eyes: Flush eyes with plenty of water. Get medical attention. Skin: Remove contaminated clothing and clean before reuse. Wash all exposed areas of skin with plenty of soap and water. Get medical attention if irritation develops. Inhalation: Move individual to fresh air. Get medical attention if breathing difficulty occurs. If not breathing, provide artificial respiration assistance (mouth-to-mouth) and call a physician immediately. Ingestion: Do not induce vomiting. Call a physician or poison control center. If available, administer activated charcoal (6-8 heaping teaspoonfuls) with two to three glasses of water. Do not give anything by mouth to an unconscious person. Immediately transport to a medical care facility and see a physician. Page 5 NAME: Cefaclor Capsules and Tablets REVISED DATE: August 16, 1993 - ---------------------------------Section 7 - HANDLING PRECAUTIONS--------------- Filled capsules and coated compressed tablets are not considered hazardous under normal handling procedures. The following are recommended for a production setting: Respiratory Protection: Use an approved respirator. Eye Protection: Chemical goggles and/or face shield. Ventilation: Laboratory fume hood or local exhaust ventilation. Other Protective Equipment: Chemical-resistant gloves and body covering to minimize skin contact. If handled in a ventilated enclosure, as in a laboratory setting, respirator and goggles or face shield may not be required. Safety glasses are always required. Other Handling Precautions: In production settings, airline-supplied, hood- type respirators are preferred. Shower and change clothing if skin contact occurs. - -------------------Section 8 - SPILL, LEAK, AND DISPOSAL PROCEDURES------------- Spills: Contain dry material by sweeping up or vacuuming. Vacuuming may disperse dust if appropriate dust collection filter is not part of the vacuum. Be aware of potential for dust explosion when using electrical equipment. Wear protective equipment, including eye protection, to avoid exposure (see Section 7 for specific handling precautions). Waste Disposal: Dispose of any cleanup materials and waste residue according to applicable federal, state, and local regulations. Page 6 NAME: Cefaclor Capsules and Tablets REVISED DATE: August 16, 1993 - -----------------------------------Section 9 - SHIPPING INFORMATION------------- (Proper Shipping Name / Hazard Class / UN Number) DOT: Not regulated for surface transport. ICAO: Not regulated for air transport. IMO: Not regulated for water transport. - -------------------------------------------------------------------------------- For additional information call: Occupational Health and Safety Eli Lilly and Company 317-276-3494 For additional copies call: Customer Services Eli Lilly and Company 1-800-LILLY-Rx (1-800-545-5979) Page 7 ATTACHMENT IV TO MRD THIRD PARTY FORECAST* FOR FINISHED PRODUCT MANUFACTURED BY LILLY Date: To: From: Customer Service Company: Phone: phone: fax: Address: Eli Lilly Industries, Inc. Call Box 1198 Pueblo Station Carolina, Puerto Rico 00986-1198 Attention: Customer Services, PR03 Product Title: Item Code: Current Calendar Year and Next by Month Requested Qty PO Qty PO# PO Due Date/Comments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Calendar Year Next (May be partially listed by month above) Yr After *To be provided monthly by Lilly ATTACHMENT V PRODUCT SPECIFICATIONS [Graphic representation: beakers and test tubes with LILLY ADMIN LIMS in a circle] ELI LILLY AND COMPANY PRODUCT SPECIFICATION DOCUMENT TA4220 Tablets No. 4220 CECLOR CD, 375 (Cefaclor, Convenient Dose Tablets) As of: 20-AUG-1996 Printed Date: 20-AUG-1996 12:40 Program: AL_SM_PROD_SPEC_DOC Distribute to: SERRA, ANGELA Drop Code: 80PI TA4220 ELI LILLY AND COMPANY PRODUCT SPECIFICATION DOCUMENT As of: 20-AUG-1996 TITLE: Tablets No. 4220 CECLOR CD. 375 (Cefaclor, Convenient Dose Tablets) - -------------------------------------------------------------------------------- FORMULATION DESC: STANDARD COUNTRY: UNITED STATES OF AMERICA CAUTIONS: Intact Cefaclor Capsules and Tablets are not considered to be a health hazard. Cefaclor Capsules and Tablets contains cefaclor which may be irritating to the eyes and causes severe allergic reactions. DESCRIPTION: A compressed, modified paracapsule shape, dual radii, size 3, blue film-coated tablet imprinted with the script Lilly, Ceclor CD 375 with edible black ink. STORAGE REQUIREMENTS: Refer to Corporate Product Dating and Storage Manual for current storage requirements. EXPIRATION PERIOD: Refer to Corporate Product Dating and Storage Manual for current dating REGULATORY STATUS: NDA 50-673 CONTAINERS: Refer to current Master Packaging Order(s) for approved container/closure systems. HANDLING: N/A HOUSE SAMPLE STORAGE INSTRUCTIONS: For finished trade package(s) sample removal refer to departmental procedure GN-0093-OQC. STANDARDS: MANUFACTURED Standard Testing Stage: AFTER COATING CEFACLOR Molecular Formula: C15 H14 C1 N3 O4 S.H2O Act Ingrd Label Amount: 375 % Excess: 1 Act Ingrd Label Units: mg/Tablet ACCEPTANCE Spec: 100179-3 Method: B00402 HPLC: REVERSE PHASE Comments: N=10, N=30 (YP FROM S-70) NLT 356.3 mg/Tablet Cefaclor (95.0%) NMT 405.0 mg/Tablet Cefaclor (108.0%) REGULATORY Spec: 100180-2 Method: B00402 HPLC: REVERSE PHASE NLT 337.5 mg/Tablet CEFACLOR (90.0%) NMT 412.5 mg/Tablet CEFACLOR (110.0%) DISSOLUTION INFORMATIONAL Spec: 100775-1 Method: B00416 UV Units: Qualifier: AT 3 HOURS EQUAL TO RESULTS AT 3 HOURS NO LIMITS Page 2 TA4220 As of: 20-AUG-1996 TITLE: Tablets No. 4220 CECLOR CD. 375 (Cefaclor, Convenient Dose Tablets) - -------------------------------------------------------------------------------- Standard Testing Stage: AFTER COATING (Continued) DISSOLUTION (Continued) REGULATORY Spec: 100183-1 Method: B00416 UV NLT 20% AND NMT 50%, 60 MINUTES. REGULATORY Spec: 100184-1 Method: B00416 UV NLT 80%, 240 MINUTES REGULATORY Spec: 100295-1 Method: B00416 UV NLT 5% AND NMT 30%, 30 MINUTES IC CEFACLOR REGULATORY Spec: 100187-2 Method: B00402 HPLC: REVERSE PHASE RETENTION TIME OF SAMPLES COMPARES WITH THAT OF THE REFERENCE STANDARD. REL SUBS REGULATORY Spec: 100189-1 Method: B00379 HPLC: GRADIENT Comments: TOTAL NMT 4.0 Percent Related Substances Total REL SUBS: INDIVIDUAL REGULATORY Spec: 100188-1 Method: B00379 HPLC: GRADIENT Comments: INDIVIDUAL NMT 1.0 Percent Related Substances: Individual UNIFORMITY OF DOSAGE UNITS ACCEPTANCE Spec: 101312-1 Method: B00402 HPLC: REVERSE PHASE Comments: N=10, N=30 95%/95% Tolerance limits for Cefaclor are within 85.0-115.0% of the USP Reference Value and no critical dosage unit. REGULATORY Spec: 101313-1 Method: B00402 HPLC: REVERSE PHASE Comments: N=10,N=30 Meets USP content uniformity requirements WATER REGULATORY Spec: 100190-1 Method: B0024 KARL FISCHER NMT 6.5 Percent Water Page 3 TA4220 As of: 20-AUG-1996 TITLE: Tablets No. 4220 CECLOR CD. 375 (Cefaclor, Convenient Dose Tablets) - -------------------------------------------------------------------------------- Standard Testing Stage: AFTER PACKAGING PHYSICAL APPEARANCE ACCEPTANCE Spec: 100191-1 Method: A02637 It is a blue tablet, imprinted with the script Lilly, Ceclor CD 375 with black ink. TA4221 PAGE 1 OF 3 ELI LILLY AND COMPANY PRODUCT SPECIFICATIONS TITLE: TABLETS NO. 4221 CECLOR CD, 500 MG (CEFACLOR CONVENIENT DOSE TABLETS) Rev. No. 1.1 (Effective date to be determined) CAUTIONS: Eye irritant. Allergen. Digestive effects. Detailed hazard information for this item should be obtained from the material safety data sheets on the VTX system or from other local official source, if VTX is not available. REASON FOR THIS REVISION: 1. Transfer the before coating assays to the after coating stage. DESCRIPTION: A compressed, modified paracapsule shape, dual radii, size 4, blue film-coated tablet imprinted with the script Lilly, Ceclor CD 500 with edible black ink. ADDED SUBSTANCES: NONE REGULATORY STATUS: NDA 50-673 DATING AND STORAGE: Refer to "Corporate Product Dating and Storage Manual" for Current dating and storage requirements. CONTAINERS: Refer to current Master Packaging Orders for the approved container/ closure systems. HANDLING: N/A STANDARDS: After Coating Acceptance Limits Regulatory Limits - ------------- ----------------- ----------------- Cefaclor 475.0-540.0mg/tab 450.0-550.0mg/tab C15H14CIN3O4S _ H20 (95.0 - 108.0%) (90.0 - 110.0%) Excess - 1% Label claim 500 mg/tab Combined estimated Mean from S-70 HPLC Method TA4221 PAGE 2 OF 3 TABLETS NO. 4221 CECLOR CD 500 MG Rev. No. 1.1 (Effective date to be determined) After Coating Acceptance Limits Regulatory Limits - ------------- ----------------- ----------------- Uniformity of Dosage Units (CASE A): 95%/95% tolerance Meets USP Test by content uniformity limits for Cefaclor are within HPLC Method 85.0 - 115.0% of the USP ref. value and no. critical dosage unit samples. Dissolution NLT 5% and NMT 30% dissolved NLT 5% and NMT than in 30 minutes, NLT 20% and NMT 30% dissolved in 30 50% dissolved in 60 minutes, minutes, NLT 20% and NLT 80% dissolved in 240 and NMT 50% minutes. dissolved in 60 minutes, and NLT 80% dissolved in 240 minutes. Meets USP Acceptance Criteria. -Canada requirements: NLT 40% dissolved in 120 min. Identification Same as Regulatory Retention time of (Cefaclor) samples compares HPLC Method with that of the reference standard Related Substances NMT 1.0% Individual Not more than 1.0 % HPLC Method NMT 4.0% Total individual related substance and not more than 4.0% total related substance Canada Requirements: NMT 0.5% Individual NMT 2.0% Total Water (Karl Fischer) Same as Regulatory Not more than 6.5% AFTER FINISHING: Physical appereance: Each packaging order will be visually identified by size, shape, color and logo by Quality Control. OTHER IMPORTANT INFORMATION: House sample -- for finished trade package(s) sample removal refer to departmental procedure GN-0093-OQC. TA4221 PAGE 3 OF 3 TABLETS NO. 4221 CECLOR CD 500 MG Rev. No. 1.1 (Effective date to be determined) OTHER IMPORTANT INFORMATION: Informational only: Dissolution For informational purposes 120 and 180 (Additional) min will be run. Written by: A. Serra QC REP PR03 08/20/96 [Graphic representation: beakers and test tubes with LILLY ADMIN LIMS in a circle] ELI LILLY AND COMPANY PRODUCT SPECIFICATION DOCUMENT TA4143 Tablets No. 4143 Keftab, 500 mg (Cephalexin Hydrochloride Tablets) As of: 20-AUG-1996 Printed Date: 20-AUG-1996 12:40 Program: AL_SM_PROD_SPEC_DOC Distribute to: SERRA, ANGELA Drop Code: 80PI TA4143 DISTA PRODUCTS COMPANY PRODUCT SPECIFICATION DOCUMENT As of: 20-AUG-1996 TITLE: Tablets No. 4143 Keftab, 500 mg (Cephalexin Hydrochloride Tablets) - -------------------------------------------------------------------------------- FORMULATION DESC: STANDARD COUNTRY: UNITED STATES OF AMERICA CAUTIONS: Intact Cephalexin Hydrochloride Tablets are not considered to be a health hazard. Cephalexin Hydrochloride Tablets contains cephalexin hydrochloride which may be irritating to the eyes and causes severe allergic reactions. DESCRIPTION: An elliptical shaped, dark green, sugar coated tablet imprinted with "KEFTAB 500". STORAGE REQUIREMENTS: Refer to the Corporate Product Dating and Storage Manual for current dating. Refer to the Corporate Product Dating and Storage Manual for current storage requirements. EXPIRATION PERIOD: Refer to the Corporate Product Dating and Storage Manual for current dating. REGULATORY STATUS: NDA 50-614 ADDED SUBSTANCES: None CONTAINERS: Refer to the current Master Packaging Order(s) for approved container/closure system(s). HANDLING: Expensive HOUSE SAMPLE STORAGE INSTRUCTIONS: Finished trade package(s) of at least 100 tablets from each packaging order. STANDARDS: MANUFACTURED Standard Testing Stage: BEFORE COATING CEPHALEXIN Molecular Formula: C16 H17 N3 O4 S ACCEPTANCE Spec: 14679-3 Method: A14040HPLC Comments: Combined estimate mean from S-70, N=10,N=30 NLT 475.0 mg/Tablet 95.0 % NMT 540.0 mg/Tablet 108.0% REGULATORY Spec: 14682-3 Method: A14040HPLC Comments: Combined estimate mean from S-70,N=10,N=30 NLT 450.0 mg/Tablet 90.0% NMT 550.0 mg/Tablet 110.0% UNIFORMITY OF DOSAGE UNITS ACCEPTANCE Spec: 14690-2 Method: A14040HPLC CASE A; 95/95 tolerance limits for Cephalexin within 85.0-115.0% of the USP Reference value and no critical dosage unit samples. REGULATORY Spec: 14693-2 Method: A14040HPLC Meets USP content uniformity requirements Page 2 TA4143 As of: 20-AUG-1996 TITLE: Tablets No. 4143 Keftab, 500 mg (CephalexIn Hydrochloride Tablets) - -------------------------------------------------------------------------------- Standard Testing Stage: AFTER COATING CEPHALEXIN Molecular Formula: C16 H17 N3 O4 S ACCEPTANCE Spec: 14704-3 Method: A14040HPLC Comments: Composite sample, N=20 NLT 475.0 mg/Tablet 95.0 % NMT 540.0 mg/Tablet 108.0 % REGULATORY Spec: 14706-3 Method: A14040HPLC Comments: Composite sample, N=20 NLT 450.0 mg/Tablet 90.0 % NMT 550.0 mg/Tablet 110.0 % DISSOLUTION REGULATORY Spec: 14707-1 Method: B00344 ROTATING BASKET NLT 75% Q/45 minutes ID CEPHALEXIN ACCEPTANCE Spec: 102117-1 Method: A14040HPLC The retention time of the Cephalexin peak from the sample chromatogram compares qualitatively with the reference standard chromatogram obtained in the same manner.. REGULATORY Spec: 101682-1 Method: A01254IR The sample spectrum compares qualitatively with the reference standard obtained in the same manner. WATER REGULATORY Spec: 14709-1 Method: A09475KARL FISCHER NMT 8.0 Percent Standard Testing Stage: AFTER PACKAGING PHYSICAL APPEARANCE ACCEPTANCE Spec: 14710-2 Method: A02637 It is an elliptical shaped, dark green, coated tablet imprinted with KEFTAB 500 packaged as an Identi-Dose or in an amber plastic bottle. *** End of Report *** MRD ATTACHMENT VI PRICES OF PRODUCTS AND SAMPLES (a) *** will be invoiced at the following prices: Product Price ------- ----- Ceclor CD *** Bottles of 60 Tablets *** *** Bottles of 60 Tablets *** Keftab 500 mg Bottles of 100 Tablets *** (b) *** will be invoiced at the following prices: Keftab 500 mg 2 x 2 Samples *** per Sample Ceclor CD *** 2 x 2 Samples *** per Sample (c) Beginning *** and on *** shall *** the *** in *** for such presentations (determined in accordance with *** consistently applied), but in no case *** for any Product (including samples of Product) *** shall give *** notice on or before *** of any and all *** with said *** to be effective *** received after *** of the *** (d) Any modifications or adjustments to any of the prices set forth on the Exhibit C for reasons other than those described in paragraph (c), above, shall be evidenced in writing and be executed by an authorized representative of each party. - -------------------------------------- * CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED BY MEANS OF MARKING SUCH PORTIONS WITH AN ASTERISK (THE "MARK"). THIS EXHIBIT HAS BEEN FILED WITH THE SECRETARY OF THE COMMISSION WITHOUT THE MARK PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. APPENDIX B TO MANUFACTURING AGREEMENT TRANSITION PLAN Dura and Lilly each acknowledge and agree that good faith coordination and cooperation between them are essential to ensure as problem-free a transition as possible after the Closing Date. To that end, Dura and Lilly hereby agree that, from and after the Closing Date: 1. Dura shall fulfill all contractual pricing offered by Lilly on the Products for a period of time which shall not, for any applicable contract, end earlier than (a) the requisite period of notice that Lilly is required to provide under such contract in order to delete the Product from the contract plus thirty (30) days, or (b) the expiration or other termination of such contract. Lilly has provided Dura with all such contractual pricing information. 2. If any Ceclor CD or Keftab sample units or labeling does not reflect Dura as the distributor, then Dura shall affix stickers containing Dura's new NDC codes, in a form approved by the FDA, to such Products (including samples thereof) bearing a Lilly label prior to selling and shipping such Product. 3. Lilly shall notify by letter within two (2) days of the Closing Date (the form and content of which shall be mutually agreed upon by Dura and Lilly) all applicable Lilly customers of the change in the distribution of the Products. 4. (a) Subject to the provisions of paragraph (d) of this Section 4, Lilly shall be responsible for Products sold by Lilly, and for the administration and payment of all Medicaid rebates and other governmental assistance programs conditional upon payment of rebates and similar programs in which a Product sold by Lilly is involved; and Dura shall be responsible for Products sold by Dura, and for the administration and payment of all Medicaid rebates and other governmental assistance programs conditional upon payment of rebates in similar programs in which a Product sold by Dura is involved. (b) Subject to the provisions of paragraph (d) of this Section 4, Lilly shall be responsible for administration and payment of all wholesaler chargebacks involving Products sold by Lilly prior to the Closing Date, and Dura shall be responsible for administration and payment of all wholesaler chargebacks involving Products sold by Dura on or after the Closing Date. (c) Except as set forth in Section 7.12 of the Licensing Agreement and subject to the provisions of paragraph (d) of this Section 4, (Page 1 of 2) Dura shall be responsible for all returns of Products sold on or after the Closing Date, and Lilly shall be responsible for returns of Product sold before the Closing Date. (d) Notwithstanding the provisions of paragraphs (a), (b) and (c) of this Section 4, but subject to the provisions of Section 7.12 of the Licensing Agreement, if the parties are unable to determine whether a Product was sold by Lilly or by Dura, then Lilly shall be responsible for any and all rebates, chargebacks and returns received during the sixty (60) day period following the Closing Date, and Dura shall be responsible thereafter. 5. Dura and Lilly each shall in good faith cooperate and coordinate as necessary to accomplish all of the foregoing and shall otherwise each do all other things as may be reasonably necessary to accomplish the transition contemplated herein. Dura/Manufacturing Agreement/Exhibit B-8/20/96 (Page 2 of 2) EX-11 7 STATEMENTS RE COMPUTATIONS EXHIBIT 11 STATEMENTS RE COMPUTATIONS OF NET INCOME (LOSS) PER SHARE
YEAR ENDED DECEMBER 31, ------------------------------------------ 1994 1995 1996 ------------ ------------ ------------ PRIMARY NET INCOME (LOSS) PER SHARE Net Income (Loss) $ 1,936,000 $(35,778,000) $ 24,328,000 ------------ ------------ ------------ ------------ ------------ ------------ Weighted Average Number of Common and Common Equivalent Shares: Common Stock Outstanding 16,003,976 23,440,754 35,834,714 Assumed Exercise of(1): Common Stock Options 1,752,936 -- 1,772,250 Common Stock Warrants 2,103,256 -- 2,872,044 ------------ ------------ ------------ Total 19,860,168 23,440,754 40,479,008 ------------ ------------ ------------ ------------ ------------ ------------ Net Income (Loss) Per Share $ 0.10 $ (1.53) $ 0.60 FULLY DILUTED NET INCOME (LOSS) PER SHARE Net Income (Loss) $ 1,936,000 $(35,778,000) $ 24,328,000 ------------ ------------ ------------ ------------ ------------ ------------ Weighted Average Number of Common and Common Equivalent Shares Assuming Issuance of All Dilutive Contingent Shares: Common Stock Outstanding 16,003,976 23,440,754 35,834,714 Assumed Exercise of(1): Common Stock Options 1,999,924 -- 2,104,826 Common Stock Warrants 2,733,960 -- 3,562,230 ------------ ------------ ------------ Total 20,737,860 23,440,754 41,501,770 ------------ ------------ ------------ ------------ ------------ ------------ Net Income (Loss) Per Share $ 0.10 $ (1.53) $ 0.59 ------------ ------------ ------------ ------------ ------------ ------------
- ------------------------ (1) Computed based on the treasury stock method. EX-13 8 1996 ANNUAL REPORT EXHIBIT 13 ANNUAL REPORT TO SHAREHOLDERS (INCLUDING ONLY THOSE ITEMS INCORPORATED BY REFERENCE) SELECTED FINANCIAL DATA
Year ended December 31, In thousands, ----------------------- except per share data 1992 1993 1994 1995 1996 - -------------------------------------------------------------------------------------------------------------- Statement of Operations Data(1) Total revenues $ 9,561 $ 18,113 $ 32,680 $ 51,502 $ 104,119 Net income (loss)(2) $ (6,769) $ (8,173) $ 1,936 $ (35,778) $ 24,328 Net income (loss) per share(2,3) $ (0.47) $ (0.55) $ 0.10 $ (1.53) $ 0.60 BALANCE SHEET Data(1) Cash, cash equivalents and short-term investments $ 13,459 $ 6,541 $ 36,026 $ 67,820 $ 240,345 Working capital $ 12,992 $ 6,830 $ 36,506 $ 59,105 $ 219,864 Total assets $ 26,339 $ 20,048 $ 56,072 $ 143,997 $ 504,670 Long-term obligations $ 4,635 $ 4,719 $ 2,780 $ 15,427 $ 6,670 Shareholders' equity(4) $ 18,310 $ 12,571 $ 48,537 $ 109,097 $ 443,557
(1) Selected Financial Data includes Health Script subsequent to its acquisition on March 22, 1995, DDSI subsequent to its acquisition on December 29, 1995, the Rondec product line subsequent to its acquisition on June 30, 1995, the Entex product line subsequent to its acquisition on July 3, 1996 and the Ceclor CD and Keftab products subsequent to their acquisition on September 5, 1996 (see Notes 5 and 11 of the Notes to Consolidated Financial Statements). (2) In 1993 and 1995, the Company incurred charges for purchase options and acquired in-process technology totaling $2.3 million and $43.8 million, respectively. If these charges were excluded, Dura would have reported a net loss of $5.9 million, or $0.39 per share, for 1993 and net income of $8.0 million, or $0.28 per share, for 1995. (3) Adjusted for the 2-for-1 stock split in the form of a 100% dividend effective July 1, 1996. For additional information relating to net income (loss) per share and common equivalent shares, see Note 2 of the Notes to Consolidated Financial Statements. (4) No cash dividends were declared or paid during the periods presented. FINANCIAL STATMENTS AND SUPPLEMENTARY DATA. FINANCIAL TABLE OF CONTENTS Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Independent Auditors' Report Corporate Information MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following comments should be read in conjunction with the Consolidated Financial Statements and Notes contained therein. See "Risks and Uncertainties" for trends and uncertainties known to the Company that could cause reported financial information not to be necessarily indicative of the future results. RECENT DEVELOPMENTS On September 5, 1996, the Company acquired from Eli Lilly and Company exclusive U.S. marketing rights to the patented antibiotics Keftab-Registered Trademark- and Ceclor-Registered Trademark- CD. The purchase price consisted of $100.0 million paid in cash at closing plus additional future contingent payments, as discussed in Liquidity and Capital Resources below. The Company began marketing Keftab in September 1996, and launched Ceclor CD in late October 1996. On July 3, 1996, the Company acquired from Procter & Gamble Pharmaceuticals, Inc. the worldwide rights in perpetuity to the Entex-Registered Trademark- products, consisting of four prescription upper respiratory drugs. The purchase price of $45.0 million consisted of $25.0 million in cash paid at closing and $20.0 million due on July 3, 1997. The Company began marketing the Entex products in July 1996. The acquisition of the above product rights has a material impact on the Company's financial position and results of operations. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 ("1996") AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1995 ("1995") Total revenues in 1996 increased $52.6 million, up 102%, as compared to 1995. Net income for 1996 was $24.3 million as compared with a net loss of $35.8 million for 1995, a change of $60.1 million or $2.13 per share. The 1995 net loss of $35.8 million was due to charges totaling $43.8 million relating to the Company's Spiros-TM- development program, consisting of a $30.8 million noncash charge for in-process technology acquired in connection with Dura's acquisition of Dura Delivery Systems, Inc. ("DDSI") and a $13.0 million purchase option charge resulting from the cash contribution to Spiros Development Corporation ("Spiros Corp."). Pharmaceutical sales in 1996 increased by $40.3 million, or 102%, as compared to 1995 due primarily to sales of products acquired in 1996 as well as higher sales at Health Script Pharmacy Services, Inc. ("Health Script"), acquired in March 1995. Gross profit (pharmaceutical sales less cost of sales) for 1996 increased by $29.6 million, or 103%, as compared to 1995 due to the increase in pharmaceutical sales. Gross profit as a percentage of sales remained steady at 73%. Contract revenues in 1996 increased by $12.4 million, or 101%, as compared to 1995. The Company, under agreements with several companies, conducts feasibility testing and development work on various compounds for use with Spiros. In addition, the Company receives royalties primarily from the co-promotion of pharmaceutical products. Contract revenues from Spiros-related development and feasibility agreements generated $21.2 million in 1996, including $19.1 million from Spiros Corp., compared to $9.5 million, including $8.0 million from DDSI, in 1995. Contract revenues from royalties were $3.4 million in 1996 as compared to $2.6 million for 1995. Clinical, development and regulatory expenses for 1996 increased by $10.1 million to $18.5 million as compared to 1995. The increase reflects expenses incurred by the Company under feasibility and development agreements covering the use of various compounds with Spiros. Selling, general and administrative expenses in 1996 increased $16.7 million to $42.6 million as compared to 1995, and decreased as a percent of total revenues to 41% in 1996 from 50% in 1995. The dollar increase results primarily from marketing costs related to newly acquired products as well as higher costs at Health Script to support its increased sales. The decrease as a percentage of revenues reflects increased productivity of the sales force, the growth of pharmaceutical sales due to product acquisitions, and the growth of contract revenues. Interest income for 1996 increased $4.1 million to $6.9 million as compared to 1995. The increase is due to the cash generated from the August 1995 and May and November 1996 public stock offerings as well as cash generated from operations. The Company recorded an income tax provision of $3.5 million for 1996 as compared to $406,000 for 1995. The increased provision is due to the increase in income before income taxes in 1996. The 1996 provision reflects the expected combined federal and state tax rate of approximately 40% largely offset by the benefit from the utilization of net operating loss carryforwards. YEAR ENDED DECEMBER 31, 1995 ("1995") AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1994 ("1994") Total revenues in 1995 increased $18.8 million, or 58%, over 1994. However, the Company incurred a net loss in 1995 of $35.8 million, or $1.53 per share, due to charges totaling $43.8 million related to the Company's Spiros development program. The charges consisted of a $30.8 million noncash charge for in-process technology acquired in connection with Dura's acquisition of DDSI and a $13.0 million purchase option charge resulting from the cash contribution to Spiros Corp. If the charges were excluded, the Company would have reported net income in 1995 of $8.0 million or $0.28 per share. Pharmaceutical sales in 1995 increased by $17.1 million, or 77%, over 1994 due primarily to the $15.3 million in sales generated by Health Script, acquired in March 1995, 1995 product acquisitions and internally developed products that were launched in the second half of 1994. The remaining increase was generated by the pre-existing product line for which sales growth was impacted by the relatively weak cough/cold season experienced across the country in the first quarter of 1995. Gross profit for 1995 increased by $10.4 million, or 57%, as compared to 1994. Gross profit as a percentage of sales decreased to 73% in 1995 from 82% in 1994 due primarily to the lower margins generated on sales by Health Script in addition to the impact on contract pricing with managed care organizations. Contract revenues in 1995 increased by $1.7 million as compared to 1994. In 1995 and 1994, the Company recorded contract revenues of $1.6 million and $400,000, respectively, relating to an agreement with Drug Royalty Corporation USA Inc. ("DRC") under which the Company received funding through December 1995 to expand its sales force. In addition, the Company conducts development work under contracts with several companies and receives royalties. The development contracts relate to the testing and development of various compounds for use with Spiros and generated revenues in 1995 and 1994 of $9.5 million and $9.9 million, respectively, including $8.0 million and $9.2 million from DDSI. The Company recorded royalties under a new co-promotion arrangement of $813,000 in 1995. Clinical, development and regulatory expenses in 1995 decreased by $946,000 from 1994. Under an agreement with DDSI, the Company managed the development of DDSI products and incurred development expenses on behalf of DDSI in 1995 and 1994 of $6.4 million and $8.3 million, respectively, for which it received contract revenues. The decrease in DDSI development expenses resulted primarily from the shift from use of outside contractors to Dura-employed personnel and resources. The decrease in DDSI development expenses was partially offset by increased expenses associated with work being performed under development contracts for which the Company recorded contract revenues of $1.0 million in 1995, and costs associated with the internal development of respiratory pharmaceutical products. Selling, general and administrative expenses in 1995 increased by $8.0 million over 1994 and decreased as a percentage of revenues from 55% in 1994 to 50% in 1995. The dollar increase results primarily from the operating costs of Health Script, acquired in March 1995, and increased sales and contracting levels. The decrease as a percentage of revenues reflects an increase in the productivity of the sales force, the growth of pharmaceutical sales due to product acquisitions and the growth of contract revenues. Other income-net in 1995 increased by $1.4 million as compared to 1994. The increase resulted primarily from interest income on cash balances generated by the November 1994 and August 1995 stock offerings which was partially offset by interest expense resulting from obligations incurred in connection with 1995 acquisitions. The Company recorded income tax provisions of $406,000 and $34,000 in 1995 and 1994, respectively. The provisions reflect the expected combined federal and state tax rate of 40% offset by the benefit from utilization of net operating loss carryforwards, which are generally limited to 90% of taxable income. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital increased by $160.8 million to $219.9 million at December 31, 1996, from $59.1 million at December 31, 1995. Cash and cash equivalents and short-term investments increased by $172.5 million to $240.3 million at December 31, 1996, from $67.8 million at December 31, 1995. The increases resulted primarily from the net proceeds from the 1996 public stock offerings and cash generated from operations, offset by amounts paid for product acquisitions. At December 31, 1996, the Company had an aggregate of $33.0 million in other long-term obligations, of which $26.3 million is to be paid within the next year. In connection with the acquisition of Ceclor CD and Keftab marketing rights, the Company paid $100.0 million in cash. Additional future contingent payments of $15.0 million per year starting in 1999 and ending in 2003 are contingent upon Ceclor CD remaining without an extended release cefaclor competitor in the U.S. The Company has completed the first phase of construction of a manufacturing facility that will be used to formulate, mill, blend, and fill drugs to be used with Spiros, pending regulatory approval. In 1996, the Company began a two-year project to expand this facility to meet the production needs of products to be used with Spiros. Equipment purchases for and validation of the manufacturing facility are currently scheduled through 1997. In 1996, the Company also purchased for $3.2 million land for the construction of a new corporate facility, which is scheduled to be completed during 1997. At December 31, 1996, the Company had open purchase commitments for both of these facilities totaling approximately $8.0 million. The Company provides development and management services to Spiros Corp. pursuant to various agreements for the development of its dry powder drug delivery technology. Dura records contract revenues from Spiros Corp. equal to amounts due for such services, less a pro rata amount allocated to a warrant subscription receivable. The Company has a purchase option to acquire all of the shares of Spiros Corp., which is exercisable through December 31, 1999, at predetermined prices, payable at the Company's option in cash or common stock or a combination thereof. In addition, the Company has an option, through specified dates, to acquire Spiros Corp.'s exclusive rights for use of Spiros with albuterol in the cassette version for a minimum of $15.0 million in cash. The Company has a $48.7 million net operating loss carryforward for federal income tax purposes, of which approximately $20.3 million is currently available to offset future taxable income. The tax benefit from substantially all of the net operating loss carryforward currently available will be credited to common stock when and if this amount is used to offset taxable income (see Note 10 of the Notes to Consolidated Financial Statements). The Company anticipates that its existing capital resources, together with cash expected to be generated from operations and available bank borrowings, should be sufficient to finance its current operations and working capital requirements through at least 1997. Additional resources, however, may be required in connection with product or company acquisitions or in-licensing opportunities. The Company is actively pursuing the acquisition of rights to products and/or companies which may require the use of substantial capital resources. CONSOLIDATED BALANCE SHEETS
December 31, ------------ Dollars in thousands 1995 1996 - ------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 25,554 $131,101 Short-term investments 42,266 109,244 Accounts and other receivables 6,957 24,092 Inventory 3,069 7,544 - ------------------------------------------------------------------------------------- Total current assets 77,846 271,981 Property 16,133 27,500 License agreements and product rights 39,065 186,750 Goodwill 7,083 6,630 Other 3,870 11,809 - ------------------------------------------------------------------------------------- Total $ 143,997 $504,670 - ------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 8,566 $ 25,819 Current portion of long-term obligations 10,175 26,298 - ------------------------------------------------------------------------------------- Total current liabilities 18,741 52,117 Long-term obligations 15,427 6,670 Other non-current liabilities 732 2,306 - ------------------------------------------------------------------------------------- Total liabilities 34,900 61,093 - ------------------------------------------------------------------------------------- Commitments and contingencies (Notes 5, 6, 7 and 12) Shareholders' equity: Preferred stock, no par value, shares authorized -- 5,000,000; no shares issued or outstanding Common stock, no par value, shares authorized -- 100,000,000; issued and outstanding -- 31,079,424 and 43,183,591, respectively 216,514 525,350 Accumulated deficit (103,320) (78,992) Unrealized gain (loss) on investments 103 (38) Warrant subscriptions receivable (4,200) (2,743) - ------------------------------------------------------------------------------------- Total shareholders' equity 109,097 443,577 - ------------------------------------------------------------------------------------- Total $ 143,997 $504,670 - -------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, In thousands, except per share amounts 1994 1995 1996 Revenues: Sales $22,199 $ 39,308 $ 79,563 Contract 10,481 12,194 24,556 - --------------------------------------------------------------------------------------------- Total revenues 32,680 51,502 104,119 - --------------------------------------------------------------------------------------------- Operating costs and expenses: Cost of sales 3,894 10,618 21,301 Clinical, development and regulatory 9,354 8,408 18,540 Selling, general and administrative 17,976 25,955 42,631 Charge for acquired in-process technology and purchase options 43,773 - --------------------------------------------------------------------------------------------- Total operating costs and expenses 31,224 88,754 82,472 - --------------------------------------------------------------------------------------------- Operating income (loss) 1,456 (37,252) 21,647 - --------------------------------------------------------------------------------------------- Other: Interest income 483 2,768 6,897 Other -- net 31 (888) (677) - --------------------------------------------------------------------------------------------- Total other 514 1,880 6,220 - --------------------------------------------------------------------------------------------- Income (loss) before income taxes 1,970 (35,372) 27,867 Provision for income taxes 34 406 3,539 - --------------------------------------------------------------------------------------------- Net income (loss) $ 1,936 $(35,778) $ 24,328 - --------------------------------------------------------------------------------------------- Net income (loss) per share $ 0.10 $ (1.53) $ 0.60 - --------------------------------------------------------------------------------------------- Weighted average number of common and common equivalent shares 19,860 23,440 40,479
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common stock Unrealized Warrant Notes ---------------- Accumulated gain/(loss)on subscriptions receivable from In thousands, except per share data Shares Amount deficit investments receivable shareholders Total - ----------------------------------- ------ ------ ----------- ------------- ------------- --------------- -------- Balance, January 1, 1994 14,958 $ 82,238 $ (69,478) $ (190) $ 12,570 Issuance of common stock at $4.375 per share, net of issuance costs of $11 686 2,990 2,990 Issuance of common stock at $5.475 per share 228 1,250 1,250 Issuance of common stock at $6.375 per share, net of issuance costs of $2,269 4,900 28,968 28,968 Exercise of stock options and warrants 134 157 157 Issuance of common stock warrants, net of issuance costs of $5 625 625 Compensation expense -- stock options 41 41 Net income 1,936 1,936 - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 20,906 116,269 (67,542) (190) 48,537 Issuance of common stock at $12.75 per share, net of issuance costs of $3,483 4,494 53,815 53,815 Issuance of common stock in connection with the purchase of DDSI callable common stock 2,286 33,489 33,489 Issuance of common stock warrants 5,040 $(4,200) 840 Collections on notes receivable 177 177 Cancellation of restricted stock and related notes receivable (4) (13) 13 Exercise of stock options and warrants 3,397 7,679 7,679 Income tax benefit from stock options exercised 235 235 Unrealized gain on available-for-sale short-term investments $ 103 103 Net loss (35,778) (35,778) - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 31,079 216,514 (103,320) 103 (4,200) -0- 109,097 Collection of warrant subscriptions receivable 1,457 1,457 Issuance of common stock at $29.375 per share, net of issuance costs of $8,301 5,405 150,471 150,471 Issuance of common stock at $33.25 per share, net of issuance costs of $7,843 4,820 152,422 152,422 Exercise of stock options and warrants 1,880 3,153 3,153 Income tax benefit from stock options exercised 2,790 2,790 Unrealized (loss) on available-for- sale short-term investments (141) (141) Net income 24,328 24,328 - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 43,184 $525,350 $ (78,992) $ (38) $(2,743) $ -0- $443,577
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, In thousands 1994 1995 1996 - --------------------------------------------------------------------------------------------------------------- Operating activities: Net income (loss) $ 1,936 $ (35,778) $ 24,328 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 687 1,962 6,317 Charges for acquired in-process technology and purchase options 30,773 Changes in assets and liabilities: Accounts and other receivables (1,309) (4,089) (17,135) Inventory (738) (1,110) (4,475) Other assets 158 (241) (1,023) Accounts payable and accrued liabilities 1,522 4,055 22,590 - --------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) operating activities 2,256 (4,428) 30,602 - --------------------------------------------------------------------------------------------------------------- Investing activities: Purchases of short-term investments (21) (95,716) (178,901) Sales and maturities of short-term investments 56,117 111,781 Purchases of long-term investments (494) (5,000) Capital expenditures (2,756) (7,835) (12,846) Company/product acquisitions, net of cash received 744 (128,621) Other (1,290) (60) (1,864) - --------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (4,067) (47,244) (215,451) - --------------------------------------------------------------------------------------------------------------- Financing activities: Issuance of common stock and warrants -- net 32,739 61,606 307,503 Issuance of notes payable 4,360 Principal payments on long-term obligations (1,464) (22,203) (17,107) - --------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 31,275 43,763 290,396 - --------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 29,464 (7,909) 105,547 Cash and cash equivalents at beginning of year 3,999 33,463 25,554 - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 33,463 $ 25,554 $ 131,101 - --------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Cash paid during the year for: Interest (net of amounts capitalized) $ 852 $ 68 $ 0 Income taxes $ 34 $ 44 $ 266
See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY AND ITS BUSINESS ORGANIZATION -- Dura Pharmaceuticals, Inc. ("Dura" or the "Company") is a specialty respiratory pharmaceutical company. The Company develops and markets prescription pharmaceutical products for the treatment of allergies, asthma, the common cold and related respiratory conditions and is developing a pulmonary drug delivery system. PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of Dura and its wholly owned subsidiaries, Health Script Pharmacy Services, Inc., ("Health Script") acquired on March 22, 1995, and Dura Delivery Systems, Inc. ("DDSI"), acquired on December 29, 1995. All intercompany transactions and balances are eliminated in consolidation. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements and related notes. Changes in those estimates may affect amounts reported in future periods. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS -- The Company considers cash equivalents to include only highly liquid securities with an original maturity of three months or less. Investments with an original maturity of more than three months are considered short-term investments and have been classified by management as available-for-sale. Such investments are carried at fair value, with unrealized gains and losses reported as a separate component of shareholders' equity. CONCENTRATION OF CREDIT RISK -- The Company invests its excess cash in U.S. Government securities and debt instruments of financial institutions and corporations with strong credit ratings. The Company has established guidelines relative to diversification of its cash investments and their maturities, which are designed to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. The Company has not experienced any significant losses on its cash equivalents or short-term investments. The Company extends credit on an uncollateralized basis primarily to wholesale and retail drug distributors throughout the United States. Historically, the Company has not experienced significant credit losses on its customer accounts. Three wholesale customers individually accounted for 21%, 14% and 12% of 1994 sales, two wholesale customers individually accounted for 16% and 11% of 1995 sales, and three wholesale customers individually accounted for 17%, 14% and 13% of 1996 sales. INVENTORY -- Inventory is stated at the lower of cost (first-in, first-out method) or market and is comprised of finished goods and samples. PROPERTY -- Property is stated at cost and depreciated over the estimated useful lives of the assets (primarily five years, with the exception of the Company's building, which is depreciated over a period of 30 years) using the straight- line method. LICENSE AGREEMENTS AND PRODUCT RIGHTS -- The cost of license fees and product rights are capitalized and amortized on a straight-line basis over the periods estimated to be benefited, ranging from 15 to 25 years. Amortization of capitalized license fees and product rights, and related royalty payments are included in selling, general and administrative expenses in the consolidated statements of operations. Amortization of license fees and product rights totaled $200,000, $1,055,000 and $4,435,000 in 1994, 1995 and 1996, respectively. GOODWILL -- Goodwill is stated at cost and amortized on a straight-line basis over the periods estimated to be benefited, which range from 10 to 20 years. EVALUATION OF LICENSE AGREEMENTS, PRODUCT RIGHTS AND GOODWILL -- The Company continually evaluates the carrying value of the unamortized balances of license agreements, product rights and goodwill to determine whether any impairment of these assets has occurred or whether any revision to the related amortization periods should be made. This evaluation is based on management's projections of the undiscounted future cash flows associated with each product or underlying business. If management's evaluation were to indicate that the carrying values of these intangible assets were impaired, such impairment would be recognized by a write down of the applicable asset. COMMON STOCK SPLIT -- On May 29, 1996, The Board of Directors declared a two- for-one stock split on the Company's common stock effective July 1, 1996 in the form of a 100% stock dividend. All applicable share and per share data presented have been adjusted to give effect to this stock split. REVENUE RECOGNITION -- Revenues from product sales are recognized upon shipment, net of allowances for returns, rebates and chargebacks. The Company is obligated to accept from customers the return of pharmaceuticals which have reached their expiration date for which it generally ships replacement merchandise. The Company has not historically experienced significant returns of expired pharmaceuticals. Contract revenue is recognized on a basis consistent with the performance requirements of the contract. Payments received in advance of performance are recorded as deferred revenue. CLINICAL, DEVELOPMENT AND REGULATORY EXPENSES -- Clinical, development and regulatory costs are expensed as incurred. NET INCOME (LOSS) PER SHARE -- Net income (loss) per share is computed based on the weighted average number of common and common equivalent shares outstanding during each year. Net income (loss) per share is unchanged on a fully diluted basis for all years presented and has been adjusted to reflect the two-for-one stock split effective July 1, 1996. ACCOUNTING FOR STOCK-BASED COMPENSATION -- In 1996, the Company elected to adopt only the disclosure provisions of the Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Therefore, the adoption of this standard did not have an effect on the Company's financial position or results of operations (Note 9). RECLASSIFICATIONS -- Prior to Dura's acquisition of DDSI on December 29, 1995, Dura recorded costs made on behalf of DDSI as they were incurred and simultaneously accrued reimbursement from DDSI by crediting the related costs. In 1996, Dura recorded contract revenues from Spiros Development Corporation ("Spiros Corp."), a separate entity formed in December 1995, equal to the amounts due from Spiros Corp. for development and management services. The DDSI reimbursements included in the 1994 and 1995 statements of operations have been reclassified to contract revenues to conform to the presentation used for Spiros Corp. The following summarizes the impact of the reclassification on the prior years' statements of operations: Year ended December 31, ----------------------- In thousands 1994 1995 - -------------------------------------------------------------- Revenues: Contract $9,161 $8,016 - -------------------------------------------------------------- Total revenues $9,161 $8,016 - -------------------------------------------------------------- Operating Costs and Expenses: Clinical, development and regulatory: Less reimbursement from DDSI $8,260 $6,428 Selling, general and administrative 901 1,588 - -------------------------------------------------------------- Total operating costs and expenses $9,161 $8,016 - -------------------------------------------------------------- In addition, certain other reclassifications have also been made to amounts included in the prior years' financial statements to conform to the presentation for the year ended December 31, 1996. 3. SHORT-TERM INVESTMENTS The following is a summary of short-term investments:
Gross unrealized Estimated In thousands Cost gains/(losses) fair value - ------------------------------------------------------------------------------------------- December 31, 1995: U.S. government securities. . . . . . . . . $ 23,148 $ 80 $ 23,228 U.S. corporate debt securities. . . . . . . 19,015 23 19,038 - ------------------------------------------------------------------------------------------- Total . . . . . . . . . . . . . . . . . . . $ 42,163 $103 $ 42,266 - ------------------------------------------------------------------------------------------- December 31, 1996: U.S. government securities. . . . . . . . . $ 38,408 $ 41 $ 38,449 U.S. corporate debt securities. . . . . . . 70,874 (79) 70,795 - ------------------------------------------------------------------------------------------- Total . . . . . . . . . . . . . . . . . . . $109,282 $(38) $109,244 - ------------------------------------------------------------------------------------------- The amortized cost and estimated fair value of available-for-sale investments at December 31, 1996, by contractual maturity, are shown below: Estimated In thousands Cost fair value - ------------------------------------------------------------------------------- Due in one year or less . . . . . . . . . . . . . . $ 75,852 $ 75,833 Due after one year through two years. . . . . . . . 33,430 33,411 Total . . . . . . . . . . . . . . . . . . . . . . . $109,282 $109,244 - ------------------------------------------------------------------------------- 4. BALANCE SHEET DETAILS In thousands 1995 1996 - ------------------------------------------------------------------------------- Property - at cost: Land. . . . . . . . . . . . . . . . . . . . . . . . $ 1,615 $ 4,833 Buildings . . . . . . . . . . . . . . . . . . . . . 3,450 3,665 Machinery and equipment . . . . . . . . . . . . . . 2,365 5,850 Furniture and fixtures. . . . . . . . . . . . . . . 1,392 1,575 Construction in progress. . . . . . . . . . . . . . 8,687 14,353 - ------------------------------------------------------------------------------- 17,509 30,276 Less accumulated depreciation and amortization. . . (1,376) (2,776) - ------------------------------------------------------------------------------- Property. . . . . . . . . . . . . . . . . . . . . . $ 16,133 $ 27,500 - ------------------------------------------------------------------------------- License agreements and product rights: Capitalized cost. . . . . . . . . . . . . . . . . . $ 40,624 $192,744 Less accumulated amortization . . . . . . . . . . . (1,559) (5,994) - ------------------------------------------------------------------------------- License agreements and product rights . . . . . . . $ 39,065 $186,750 - ------------------------------------------------------------------------------- Goodwill: Goodwill from acquisitions. . . . . . . . . . . . . $ 11,063 $ 11,063 Less accumulated amortization . . . . . . . . . . . (3,980) (4,433) - ------------------------------------------------------------------------------- Goodwill. . . . . . . . . . . . . . . . . . . . . . $ 7,083 $ 6,630 - ------------------------------------------------------------------------------- Accounts payable and accrued liabilities: Accounts payable. . . . . . . . . . . . . . . . . . $ 3,412 $ 9,253 Contractual sales rebates . . . . . . . . . . . . . 1,605 5,582 Accrued wages, taxes and benefits . . . . . . . . . 1,341 3,447 Other accrued expenses. . . . . . . . . . . . . . . 2,208 7,537 - ------------------------------------------------------------------------------- Accounts payable and accrued liabilities. . . . . . $ 8,566 $ 25,819 - -------------------------------------------------------------------------------
5. LICENSE AGREEMENTS AND PRODUCT RIGHTS The Company has entered into agreements to acquire, in-license or co-promote respiratory prescription pharmaceuticals. A summary of recent significant acquisitions is presented as follows: - - KEFTAB-Registered Trademark-/CECLOR-Registered Trademark- CD - On September 5, 1996, the Company acquired from Eli Lilly and Company ("Lilly") exclusive U.S. marketing rights to the patented antibiotics Keftab and Ceclor CD. The purchase price consisted of $100.0 million paid in cash at closing. Additional future contingent payments of $15.0 million per year starting in 1999 and ending 2003 are subject to Ceclor CD remaining available by prescription only with no competitive products, as defined in the licensing agreement. The cost of the Keftab/Ceclor CD rights is being amortized over 25 years. - - ENTEX-Registered Trademark- - On July 3, 1996, the Company acquired from Procter & Gamble Pharmaceuticals, Inc. the North American rights to the Entex products, consisting of four prescription upper respiratory drugs. The purchase price of $45.0 million in cash is being amortized over 15 years and consisted of $25.0 million paid at closing and $20.0 million in cash due on July 3, 1997. - - RONDEC-Registered Trademark- PRODUCT LINE - On June 30, 1995, the Company acquired from Ross Products Division of Abbott Laboratories the U.S. rights to the Rondec product line of six prescription cough/cold drugs. Under the agreement the Company received cash at closing of approximately $4.4 million, paid $20.0 million on July 14, 1995, and is obligated to make additional future minimum payments which are contingent principally on the acquired products remaining available by prescription only. The cost of the Rondec product line is being amortized over 25 years. 6. DEVELOPMENT AGREEMENTS DRY POWDER INHALER - The Company has a worldwide license from a private inventor to certain dry powder drug delivery technology. The technology uses a device to aerosolize pharmaceuticals in dry powder formulations for intrapulmonary and intranasal administration. The Company is required to pay the inventor royalties on future sales of this device. The following development arrangements have been entered into regarding the dry powder inhaler technology ("Spiros-TM-"): - - PRIVATE PLACEMENT WITH DDSI - In 1993, DDSI was formed and completed a $13.0 million private placement of callable common stock to fund the development of Spiros for use with certain compounds. In connection with the private placement, the Company acquired the right to purchase all the outstanding shares of DDSI callable common stock. Pursuant to a development and management agreement, DDSI engaged the Company to develop DDSI's products and provide general management services to DDSI. Dura recorded contract revenues under the agreement with DDSI for the years ended December 31, 1994 and 1995 of $9,161,000 and $8,016,000, respectively. On December 29, 1995, the Company exercised its option and purchased 100% of DDSI's callable common stock (Note 11). - - PRIVATE PLACEMENT WITH SPIROS CORP. - On December 29, 1995, Spiros Corp., a separate, newly-formed Delaware corporation, completed a $28.0 million private placement to fund the development of Spiros for use with certain compounds. Under agreements described below, Spiros Corp. will use the proceeds from the private placement and a $13.0 million contribution from Dura to develop Spiros and Spiros applications for albuterol, beclomethasone and ipratropium (the "Compounds"), and selected proteins and peptides. If these development efforts are successful, the Company may execute its right to purchase Spiros Corp.'s callable common stock; however, the Company is not obligated to purchase such shares of Spiros Corp. The private placement consisted of 933,334 units sold at $30.00 per unit. Each unit consisted of one share of Spiros Corp. callable common stock and a Series S warrant (Note 8) to purchase 2.4 shares of the Company's common stock. In exchange for the Series S warrants and the contribution of $13.0 million to Spiros Corp., the Company has the right ("Spiros Purchase Option") through December 31, 1999, to purchase all of the currently outstanding shares of Spiros Corp. callable common stock at predetermined prices. The purchase price begins at $46.88 per share (an aggregate of $43.7 million) through December 31, 1997 and increases on a quarterly basis thereafter to a maximum of $76.17 per share (an aggregate of $71.1 million) on December 31, 1999. Such purchase price may be paid, at the Company's option, in cash, shares of the Company's common stock, or a combination thereof. In addition, Dura has the option through specified dates, to acquire Spiros Corp.'s exclusive rights for use of Spiros with albuterol in the cassette version (the "Albuterol Purchase Option"). In the event Dura acquires rights for use of Spiros with albuterol in the cassette version and does not exercise the Spiros Purchase Option, Dura will pay a royalty to Spiros Corp. on net sales of such product. A purchase option expense of $13.0 million representing the cash contributed to Spiros Corp. was recorded in December 1995. The Company also recorded a warrant subscriptions receivable and a corresponding increase in common stock of $4.2 million representing the fair market value of the Series S warrants. At December 31, 1996, the Company had a remaining Series S warrant subscriptions receivable of $2.7 million. In connection with the December 29, 1995 private placement, the Company also entered into certain other agreements with Spiros Corp. which are summarized as follows: TECHNOLOGY LICENSE AGREEMENT - Under this agreement, the Company granted to Spiros Corp., subject to existing agreements with Mitsubishi Chemical Corporation, a royalty-bearing, perpetual, exclusive license to use Spiros in connection with the Compounds and certain off-patent proteins and compounds, and certain non-exclusive rights to other compounds. Such agreement expires upon exercise by the Company of the Spiros Purchase Option and prior to such expiration, the Company may exercise the Albuterol Purchase Option under terms set forth in the agreement. INTERIM MANUFACTURING AND MARKETING AGREEMENT - Under this agreement, Spiros Corp. granted to the Company an exclusive license to manufacture and market Spiros Corp. products in the U.S. in exchange for a royalty of 10.0% on net product sales, as defined. Such agreement expires on exercise or termination of the Spiros Purchase Option. DEVELOPMENT AND MANAGEMENT AGREEMENT - Under this agreement, Spiros Corp. has engaged the Company to develop the Spiros Corp. products and provide general management services to Spiros Corp. Dura records contract revenues from Spiros Corp. equal to the amounts due from Spiros Corp. for costs and fees less a pro rata amount allocated to the Series S warrant subscription receivable. During 1996, Dura recorded contract revenues under the agreement with Spiros Corp. of $19,138,000. At December 31, 1996 the Company had a receivable from Spiros Corp. of $2,234,000 representing amounts due from Spiros Corp. for development and management costs incurred by the Company. - - OTHER DEVELOPMENT AGREEMENTS - The Company has entered into other development agreements to provide contract research and development services, generally relating to the dry powder formulation of compounds and to drug delivery technologies, including the use of Spiros. Pursuant to these agreements, the Company receives contract revenues for services provided and, in some cases, up-front and milestone payments. 7. LONG-TERM OBLIGATIONS In connection with the acquisition of license and product rights in 1995 and 1996 (Note 5), the Company entered into agreements which require future payments. The obligations are non-interest bearing and, as they pertain to the Rondec product line agreement, are principally contingent on the products remaining available by prescription only. At December 31, 1996, the future annual maturities of principal under long-term obligations are summarized as follows:
Year ending December 31, In thousands - ----------------------------------------------------------------------- 1997 $ 26,500 1998 3,000 1999 3,000 2000 500 2001 500 Thereafter 1,500 - ----------------------------------------------------------------------- 35,000 Imputed interest (7.0%) (2,032) - ----------------------------------------------------------------------- Net obligation 32,968 Less-current portion (26,298) - ----------------------------------------------------------------------- Net long-term obligations $ 6,670 - -----------------------------------------------------------------------
The future annual maturities of long-term obligations exclude approximately $82.9 million in future contingent obligations due in years 1999 through 2004 (Note 5). 8. CAPITAL STOCK COMMON STOCK -- In November 1994, August 1995, May 1996 and November 1996, the Company completed offerings of 4,900,000, 4,494,000, 5,405,000 and 4,820,000 shares of common stock, respectively, resulting in net proceeds to the Company of $29.0 million, $53.8 million, $150.5 million and $152.4 million, respectively. On May 29, 1996, the Company's shareholders approved an amendment to the Articles of Incorporation increasing the number of authorized shares of common stock from 25 to 100 million. COMMON STOCK WARRANTS -- In connection with the private placement completed by the Company and DDSI in September 1993 (Note 6), DDSI investors received Series W warrants to purchase an aggregate of 3,640,000 shares of the Company's common stock. The Series W warrants (i) are exercisable at $2.38 per share, subject to adjustment upon the occurrence of certain events as defined, (ii) are exercisable through September 27, 2000 and (iii) provide for certain registration rights. On March 22, 1995, the Company, in connection with the acquisition of Health Script (Note 11), issued warrants for 1,200,000 shares of the Company's common stock excercisable at $7.32 per share. On April 26, 1996, the Company exercised its option to redeem the warrants by issuing 251,616 shares of the Company's common stock to the holder of the warrants. In connection with the private placement completed by Spiros Corp. on December 29, 1995 (Note 6), Spiros Corp. investors received Series S warrants to purchase an aggregate of 2,240,000 shares of the Company's common stock. The Series S warrants (i) are exercisable at $19.47 per share, subject to adjustment upon the occurrence of certain events as defined, (ii) are exercisable through December 29, 2000, (iii) provide for certain registration rights and (iv) separate from the Spiros Corp. callable common stock on December 29, 1997 or earlier upon the occurrence of certain events as defined. The following table summarizes common stock warrants outstanding at December 31, 1996:
Shares Exercise Warrants covered price In thousands, except per share data outstanding by warrants per share Series W warrants 358 1,003 $ 2.38 Series S warrants 933 2,240 $19.47 Other 809 809 $0.25 -- $ 6.48 - -------------------------------------------------------------------- Total warrants outstanding 2,100 4,052 - --------------------------------------------------------------------
COMMON SHARES RESERVED -- The Company has reserved shares of common stock for issuance as follows: December 31, ------------ In thousands 1995 1996 - -------------------------------------------------------------------- Issuance under 1992 stock option plan 3,328 3,729 Exercise of common stock warrants 5,974 4,052 - -------------------------------------------------------------------- Total shares reserved 9,302 7,781 - -------------------------------------------------------------------- 9. STOCK OPTIONS The Company's 1992 stock option plan (the "Plan") provides for the grant of options to officers and other key employees of the Company, and to certain directors, consultants and independent contractors of the Company, to purchase up to 6,007,360 shares of the Company's common stock. The plan provides for the automatic issuance of options to purchase 8,000 and 30,000 shares of the Company's common stock to non-employee Board members at the date of each annual shareholders' meeting and upon initial election to the Board of Directors, respectively. Generally, options are to be granted at prices equal to at least 100% of the fair market value of the stock at the date of grant, expire not later than ten years from the date of grant and become exercisable ratably over a four-year period following the date of grant. The Plan provides that in the event of a corporate transaction, as defined, all outstanding options shall become fully exercisable immediately prior to the effective date of such transaction and shall terminate upon such effective date. The Board of Directors may also grant officers of the Company limited stock appreciation rights in tandem with their outstanding options. In addition, limited stock appreciation rights are granted in connection with all automatic option grants under the Plan. Upon the occurrence of a hostile takeover, as defined, each outstanding option with such a limited stock appreciation right in effect for at least six months will automatically be canceled in return for a cash distribution from the Company in an amount equal to the excess of the takeover price, as defined, over the aggregate exercise price. As of December 31, 1995 and 1996, options to purchase 122,000 and 176,000 shares of common stock, respectively, were outstanding with limited stock appreciation rights. The following table summarizes stock option activity under the Plan:
SHARES ------ Weighted average Options Options available exercise price outstanding for grant per share - ----------------------------------------------------------------------------------------------------- Balance, January 1, 1994 2,504,662 153,692 $ 1.61 Options authorized 750,000 Options granted 872,260 (872,260) $ 5.50 Options exercised (131,964) $ 1.17 Options canceled (119,240) 119,240 $ 2.48 - --------------------------------------------------------------------------------- Balance, December 31, 1994 3,125,718 150,672 $ 2.68 Options authorized 1,000,000 Options granted 1,100,606 (1,100,606) $10.29 Options exercised (1,093,848) $ 1.21 Options canceled (80,108) 80,108 $ 4.79 - --------------------------------------------------------------------------------- Balance, December 31, 1995 3,052,368 130,174 $ 5.89 Options authorized 1,500,000 Options granted 1,339,500 (1,339,500) $28.95 Options exercised (953,414) $ 3.20 Options canceled (53,944) 53,944 $21.48 - --------------------------------------------------------------------------------- Balance, December 31, 1996 3,384,510 344,618 $15.52 - --------------------------------------------------------------------------------- Exercisable, December 31, 1994 1,657,614 $ 2.31 Exercisable, December 31, 1995 1,524,090 $ 3.91 Exercisable, December 31, 1996 1,327,622 $ 6.99 - ---------------------------------------------------------------------------------
The following table summarizes information concerning outstanding and exercisable options as of December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------- ------------------- Weighted average Weighted Weighted remaining average average Range of Number contractual exercise Number exercise exercise prices outstanding life (years) price exercisable price - -------------------------------------------------------------------------------------------------- $ 0.25 -- $ 5.00 712,658 5.9 $ 2.52 637,919 $ 2.40 $ 5.00 -- $ 10.00 890,624 8.1 $ 6.68 424,105 $ 6.86 $ 10.00 -- $ 20.00 758,620 8.9 $ 14.56 217,564 $ 14.10 $ 20.00 -- $ 30.00 456,331 9.4 $ 28.21 44,427 $ 27.88 $ 30.00 -- $ 45.13 566,277 9.9 $ 36.84 3,607 $ 32.15
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). In accordance with the provisions of SFAS No. 123, the Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans and, accordingly, no compensation cost has been recognized for stock options in 1995 or 1996. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date amortized to expense over their vesting period as prescribed by SFAS No. 123, net income for the year ended December 31, 1996 would have been reduced by $2,707,000 ($0.07 per share) and the net loss for the year ended December 31, 1995 would have been increased by $351,000 ($0.01 per share). However, the impact of outstanding non-vested stock options granted prior to 1995 has been excluded from the pro forma calculations; accordingly, the 1995 and 1996 pro forma adjustments are not indicative of future period pro forma adjustments when the calculation will reflect all applicable stock options. The estimated weighted average fair value at grant date for the options granted during 1996 was $13.54 per option. The fair value of options at date of grant was estimated using the Black-Scholes option-pricing model with the following assumptions: Expected dividend yield N/A Expected stock price volatility 40% Risk-free interest rate 6.20% Expected life of options 5 years 10. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax assets as of December 31, 1994, 1995 and 1996 are as follows:
DECEMBER 31, ------------ In thousands 1994 1995 1996 - ------------------------------------------------------------------------------------ Deductible temporary differences: Net operating loss carryforwards $ 20,786 $ 22,052 $ 19,484 Capitalized research and development 6,388 6,404 Research and development credits 1,670 1,670 Reserves and accruals not currently deductible 83 728 1,560 Depreciation and amortization (319) (269) - ------------------------------------------------------------------------------------ Total deferred tax assets 20,869 30,519 28,849 Valuation allowance for deferred tax assets (20,869) (30,519) (28,849) - ------------------------------------------------------------------------------------ Net deferred tax assets $ -- $ -- $ -- - ------------------------------------------------------------------------------------
The Company has provided a 100% valuation allowance against deferred tax assets as of December 31, 1994, 1995 and 1996 as realization of such assets is uncertain. At December 31, 1996, the valuation allowance for deferred tax assets included approximately $7.6 million relating to stock option exercises that will be credited to common stock when and if the underlying deferred tax asset is recognized. At December 31, 1996, the Company had federal and California net operating loss ("NOL") carryforwards of approximately $48.7 million and $17.0 million, respectively. The difference between the NOL carryforwards for federal and California income tax purposes is primarily attributable to the 50% use limitation on California NOL carryforwards. The federal and California NOL carryforwards will begin expiring in 2000 and 1997, respectively, unless previously utilized. As of December 31, 1996, approximately $20.3 million of the total federal NOL carryforwards were currently available for use by the Company to generally offset 90% of future taxable income. The difference between the total NOL carryforwards and the NOL carryforwards currently available for use by the Company results from the limitations of Section 382 of the Internal Revenue Code due to a "change of ownership." The NOL carryforwards available for use by the Company as a result of the Section 382 limitation will be increased by approximately $2.9 million per year through 2006. The provision for income taxes for the years ended December 31, 1994, 1995 and 1996 is comprised primarily of current federal and state income tax expense. A reconciliation of the income tax provision (benefit) based on federal statutory rates and income (loss) before income taxes to the provision for income taxes, as reported, is as follows: Year ended December 31, 1994 1995 1996 In thousands Provision (benefit) at federal statutory rates $ 660 $ (12,027) $ 9,475 Tax effect of timing differences -- write-off of development inventory (660) Charges for acquired in-process technology and purchase options 14,883 NOL carryforwards utilized (2,946) (6,852) Federal alternative minimum tax 235 234 Other 34 261 682 - ------------------------------------------------------------------------------- Provision for income taxes $ 34 $ 406 $ 3,539 During the years ended December 31, 1995 and 1996 the Company recorded tax benefits from stock option exercises of $235,000 and $2,790,000, respectively, which were credited to common stock. 11. ACQUISITIONS These following acquisitions have been accounted for under the purchase method of accounting and, accordingly, the operating results of these acquisitions are included in the Company's consolidated results of operations from the date of acquisition. HEALTH SCRIPT -- On March 22, 1995, the Company acquired all of the common stock of Health Script and certain assets of a related affiliate. Health Script, located in Denver, Colorado, is a mail service pharmacy which dispenses respiratory pharmaceuticals. The purchase price of $7,340,000 consisted of a cash payment of $6.5 million, and warrants to purchase 1,200,000 shares of the Company's common stock (Note 8). The assets acquired include cash, inventory, furniture and equipment valued at $425,000, and goodwill valued at approximately $6.9 million. DDSI -- On December 29, 1995, the Company acquired all of the outstanding callable common stock of DDSI (Note 6). The purchase price of approximately $33.5 million consisted of 2,285,108 registered shares of the Company's common stock. The net assets acquired included cash of $3.4 million, equipment valued at $380,000 and DDSI's payable to Dura for development and management services of $995,000. The excess of the purchase price over the fair value of the net assets acquired of approximately $30.8 million was allocated to in-process technology. The Company concluded, based on an assessment of the additional development, testing and regulatory approvals required, that the commercial viability of the technology had not yet been established. In addition, no alternative future uses of the technology, not requiring regulatory approval, have been established. As a result of this assessment, the acquired in-process technology was expensed as a noncash charge in December 1995. The following unaudited pro forma summary presents the consolidated results of operations as if the acquisitions had occurred on January 1, 1994, after giving effect to certain adjustments, including amortization of goodwill and issuance of Company common stock. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made on January 1, 1994, nor is it indicative of future results. Year ended December 31, In thousands, except per share data (unaudited) 1994 1995 - --------------------------------------------------------------------------- Revenues $ 31,784 $ 45,719 Net loss $ (7,166) $ (13,535) Net loss per share $ (0.32) $ (0.52) 12. COMMITMENTS EMPLOYEE SAVINGS PLANS -- The Company has a 401(k) plan that allows participating employees to contribute 1% to 15% of their salary, subject to annual limits. The Board may, at its sole discretion, approve Company contributions. The Company made contributions to the plan totaling $89,800, $223,500 and $531,720 in 1994, 1995 and 1996, respectively. The Company has a non-qualified deferred compensation plan that allows eligible employees to defer up to 100% of their compensation. As of December 31, 1996, $2,185,000 has been deferred under this plan which is included in other assets and other non-current liabilities. The amounts deferred under this plan are transferred to a trust and managed by an investment manager. Included in the trust investments at December 31, 1996, are 16,667 units of Spiros Corp. (Note 6). CAPITAL -- The Company is constructing at its headquarters a manufacturing facility that, subject to regulatory approval, will be used to formulate, mill, blend and fill drugs to be used with Spiros. Included in construction in-progress at December 31, 1996 are capital expenditures relating to the facility of approximately $13.7 million. During 1996, the Company acquired for $3.2 million land for the construction of a new corporate facility. At December 31, 1996, the Company had open purchase commitments relating to these facilities totaling approximately $8.0 million. During the years ended December 31, 1994, 1995 and 1996, the Company capitalized interest of $40,000, $487,000 and $624,000, respectively, as a cost of constructing the manufacturing facility. LINE OF CREDIT -- The Company has a loan and security agreement with a bank for the borrowing of up to $5.0 million that terminate in June 1997. Borrowings under the agreement are limited to 2.5 times the most recent quarter's earnings (as defined) before interest, taxes, depreciation and amortization and bear interest at the bank's prime rate plus 0.5% (8.75% at December 31, 1996). At December 31, 1995 and 1996, there were no borrowings outstanding under this agreement. 13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of unaudited quarterly results of operations for the years ended December 31, 1995 and 1996. First Second Third Fourth quarter quarter quarter quarter - ------------------------------------------------------------------------------- 1995 Total revenues $ 9,437 $ 13,069 $ 13, 189 $ 15,807 Operating income 393 1,577 1,532 (40,754) Net income (loss) 857 1,811 1,767 (40,213) Net income (loss) per share 0.03 0.07 0.06 (1.44) 1996 Total revenues $ 18,587 $ 18,800 $ 25,920 $ 40,812 Operating income 3,712 3,862 4,602 9,471 Net income 4,057 4,609 5,806 9,856 Net income per share 0.11 0.12 0.14 0.22 See Notes 5 and 11 for discussion of Dura's acquisitions of product rights and companies which occurred during 1995 and 1996, affecting the Company's quarterly results of operations. INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Dura Pharmaceuticals, Inc.: We have audited the accompanying consolidated balance sheets of Dura Pharmaceuticals, Inc. and subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Dura Pharmaceuticals, Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. San Diego, California January 20, 1997 CORPORATE INFORMATION DIRECTORS Cam L. Garner CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER DURA PHARMACEUTICALS, INC. James C. Blair, Ph.D. GENERAL PARTNER DOMAIN ASSOCIATES Herbert J. Conrad SENIOR VICE PRESIDENT HOFFMANN-LA ROCHE, RETIRED Joseph C. Cook, Jr. PRINCIPAL LIFE SCIENCE ADVISORS, LLC David F. Hale CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER GENSIA SICOR, INC. David S. Kabakoff, Ph.D. EXECUTIVE VICE PRESIDENT DURA PHARMACEUTICALS, INC. Gordon V. Ramseier EXECUTIVE DIRECTOR THE SAGE GROUP Charles G. Smith, Ph.D. PRIVATE CONSULTANT Walter F. Spath SENIOR VICE PRESIDENT, SALES AND MARKETING DURA PHARMACEUTICALS, INC. OFFICERS Cam L. Garner CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER David S. Kabakoff, Ph.D. EXECUTIVE VICE PRESIDENT Julia R. Brown SENIOR VICE PRESIDENT, BUSINESS DEVELOPMENT AND PLANNING James W. Newman SENIOR VICE PRESIDENT, FINANCE AND ADMINISTRATION AND CHIEF FINANCIAL OFFICER Charles W. Prettyman SENIOR VICE PRESIDENT, DEVELOPMENT AND REGULATORY AFFAIRS Walter F. Spath SENIOR VICE PRESIDENT, SALES AND MARKETING Mitchell R. Woodbury SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY Chester Damecki VICE PRESIDENT, OPERATIONS Malcolm R. Hill VICE PRESIDENT, CLINICAL DEVELOPMENT Robert W. Keith VICE PRESIDENT, MANAGED CARE Erle T. Mast VICE PRESIDENT, FINANCE Robert K. Schultz, Ph.D. VICE PRESIDENT, PRODUCT DEVELOPMENT David Sudolsky VICE PRESIDENT, MARKETING Clyde L. Witham VICE PRESIDENT, SCIENCE AND TECHNOLOGY Michael T. Borer GENERAL MANAGER, HEALTH SCRIPT CORPORATE HEADQUARTERS 5880 Pacific Center Boulevard San Diego, California 92121-4204 Telephone (619) 457-2553 AUDITORS Deloitte & Touche LLP San Diego, California SHAREHOLDERS At March 1, 1997, there were approximately 330 holders of record of Dura's common stock. DIVIDENDS No cash dividends were declared or paid in 1994, 1995 or 1996. TRANSFER AGENT AND REGISTRAR Chase Mellon Shareholders Services, LLC 400 S. Hope St., 4th Floor Los Angeles, California 90071 (213) 553-9719 REQUESTS FOR INFORMATION Copies of the Form 10-K filed with the Securities and Exchange Commission, financial communications and general information on the Company are available without charge upon request to Investor Relations, Dura Pharmaceuticals, 5880 Pacific Center Boulevard, San Diego, CA 92121-4204. ANNUAL MEETING The annual meeting of shareholders will be held at 10 a.m., Wednesday, May 28, 1997 at the La Jolla Marriott, 4240 La Jolla Village Drive, La Jolla, CA 92037. MARKET INFORMATION ON COMMON STOCK Dura Pharmaceuticals' common stock is traded on the Nasdaq National Market under the symbol "DURA." The following table reflects the range of high and low trade prices of Dura's common stock by quarter for 1994, 1995 and 1996. This information is based upon prices reported by the Nasdaq National Market: High Low - ------------------------------------------------------ 1994 First Quarter $ 5 $ 3 1/8 Second Quarter $ 5 1/2 $ 3 3/4 Third Quarter $ 6 5/8 $ 5 1/8 Fourth Quarter $ 7 1/2 $ 5 1/4 1995 First Quarter $ 7 1/2 $ 5 3/4 Second Quarter $ 9 7/8 $ 6 1/2 Third Quarter $ 17 1/2 $ 9 1/8 Fourth Quarter $ 17 3/4 $ 13 1/4 1996 First Quarter $ 26 3/8 $ 16 3/4 Second Quarter $ 34 1/2 $ 23 11/16 Third Quarter $ 40 $ 21 3/8 Fourth Quarter $ 47 3/4 $ 31 1/2 Dura-Tap-Registered Trademark-/PD, Entex-Registered Trademark-, Furadantin- Registered Trademark- and Rondec-Registered Trademark- are registered trademarks of the Company. The Company claims common law trademark rights to Spiros-TM-, Dura-Vent/DA-TM- and D.A. Chewable-TM-. Tornalate-Registered Trademark- is a registered trademark of Sanofi-Winthrop, Inc. Crolom-TM- is a trademark of Bausch & Lomb Pharmaceuticals, Inc. Capastat-Registered Trademark-, Seromycin-Registered Trademark-, Ceclor-Registered Trademark-, Ceclor-Registered Trademark- CD and Keftab-Registered Trademark- are registered trademarks of Eli Lilly and Company. EX-23 9 INDEPENDENT AUDITORS CONSENT INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-10513 on Form S-8 and Registration Statement Nos. 33-71798, 33-99722 and 33-93914 on Form S-3 of Dura Pharmaceuticals, Inc. of our report dated January 20, 1997, incorporated by reference in this Annual Report on Form 10-K of Dura Pharmaceuticals, Inc. for the year ended December 31, 1996. /s/ DELOITTE & TOUCHE LLP San Diego, California March 24, 1997 EX-24 10 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY (See Signature Page) EX-27 11 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996, AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996, AND THE NOTES THERETO, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS AND NOTES. YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 131,101 109,244 24,092 0 7,544 271,981 30,276 2,776 504,670 52,117 0 0 0 525,350 (78,992) 443,577 104,119 104,119 21,301 82,472 677 0 0 27,867 3,539 24,328 0 0 0 24,328 .60 .59
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