-----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, N2t4mHGmWVnhIzfD4fGblKPrzgMQU+C53JcQ1eC9ph1EhHx29N3y6wNlBFFH6nQ1 XJLjyf9W4TT/t4P5i9nkIg== 0001036050-00-000357.txt : 20000316 0001036050-00-000357.hdr.sgml : 20000316 ACCESSION NUMBER: 0001036050-00-000357 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIROPHARMA INC CENTRAL INDEX KEY: 0000946840 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 232789550 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-21699 FILM NUMBER: 570127 BUSINESS ADDRESS: STREET 1: 405 EAGLEVIEW BLVD STREET 2: PO BOX 5000 CITY: EXTON STATE: PA ZIP: 19341 BUSINESS PHONE: 6104587300 MAIL ADDRESS: STREET 1: 76 GREAT VALLEY PARKWAY CITY: MALVERN STATE: PA ZIP: 19355 10-K405 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K (Mark One) [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 OR [_] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number: 0-21699 VIROPHARMA INCORPORATED (Exact name of registrant as specified in our charter) 94-2347624 Delaware (I.R.S. Employer Identification (State or other jurisdiction of No.) incorporation or organization) 19341 405 Eagleview Boulevard (Zip Code) Exton, Pennsylvania (Address of principal executive offices) Registrant's telephone number, including area code: 610-458-7300 Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered: -------------------- ------------------------------------------ None None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.002 ---------------- 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 approximate aggregate market value of the voting stock held by non- affiliates of the registrant was approximately $1,324,000,000 as of March 1, 2000, based upon the closing sale price per share of the Common Stock as quoted on the Nasdaq National Market. This amount excludes 3,338,645 shares of the registrant's voting stock held by directors, officers and stockholders with representatives on the board of directors whose ownership exceeds ten percent of the registrant's Common Stock outstanding at March 1, 2000. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant. The number of shares of the registrant's Common Stock outstanding as of March 1, 2000 was 15,119,936. DOCUMENTS INCORPORATED BY REFERENCE As stated in Part III of this Annual Report on Form 10-K, portions of the registrant's definitive proxy statement for the registrant's 2000 Annual Meeting of Stockholders to be held on May 18, 2000 are incorporated by reference in Part III of this Annual Report on Form 10-K. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- VIROPHARMA INCORPORATED FORM 10-K ANNUAL REPORT For Fiscal Year Ended December 31, 1999 TABLE OF CONTENTS
Page ---- PART I Item 1. Business 1 Item 2. Properties 25 Item 3. Legal Proceedings 25 Item 4. Submission of Matters to a Vote of Security Holders 25 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 27 Item 6. Selected Financial Data 27 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 28 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 32 Item 8. Financial Statements and Supplementary Data 33 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 33 PART III Item 10. Directors and Executive Officers of the Registrant 33 Item 11. Executive Compensation 33 Item 12. Security Ownership of Certain Beneficial Owners and Management 33 Item 13. Certain Relationships and Related Transactions 33 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 34 Index to Financial Statements 37
"ViroPharma" is a trademark and service mark of ViroPharma. We have applications to register the trademark and service mark in the United States and Canada. All other brand names or trademarks appearing in this Annual Report on Form 10-K are the property of others. PART I Business ITEM 1. BUSINESS Overview We are a pharmaceutical company dedicated to the commercialization, development and discovery of new antiviral medicines. We have focused our current drug development and discovery activities on a number of ribonucleic acid, or RNA, virus diseases, including: . viral respiratory infection, or VRI; . viral meningitis; . hepatitis C; and . respiratory syncytial virus diseases, or RSV diseases. In September 1999, we commenced our Phase III clinical program with our lead product candidate, pleconaril, for the treatment of VRI, a severe form of the common cold. We are also conducting a Phase III clinical program with pleconaril for the treatment of viral meningitis. In July 1999, we reported our preliminary analysis of data from our Phase II clinical program with pleconaril for the treatment of VRI. We reported our preliminary analyses of data from our Phase II/III program with pleconaril for the treatment of viral meningitis in adults and adolescents in January 1999 and in pediatric patients in November 1998. We expect to have preliminary results from the first Phase III clinical trial in VRI and the two Phase III clinical trials in viral meningitis, in the first half of 2000. We commenced a Phase I clinical program with our hepatitis C product candidate in collaboration with American Home Products Corporation in February 2000. We have additional proprietary compounds in research, preclinical and early clinical stages of development for the treatment of hepatitis C and RSV diseases. We believe that our drug discovery and development technologies and expertise have potential applicability to a broad range of diseases caused by RNA viruses. RNA viruses are responsible for the majority of human viral diseases, causing illnesses ranging from acute and chronic ailments to fatal infections. We were incorporated in Delaware in September 1994 and commenced operations in December 1994. Our executive offices and research facility are located at 405 Eagleview Boulevard, Exton, PA 19341, and our telephone number is 610-458- 7300. Diseases Caused By Viruses Viruses are intracellular parasites that require a living host cell within which to reproduce. Infection by viruses, and their ensuing replication, can lead to disease. Viral epidemics, pandemics, acute outbreaks and chronic viral diseases continue to cause an enormous amount of human suffering and death. There are three fundamental classes of viruses: . deoxyribonucleic acid, or DNA, viruses, which use DNA as their genetic material and replicate their DNA in a manner similar to human cells; . retroviruses, which reproduce by first converting their RNA into DNA in infected cells, then converting this DNA back into RNA; and . RNA viruses, which have the unique ability to directly reproduce their RNA to create new RNA virus offspring through a process known as RNA replication. This ability to directly replicate RNA distinguishes RNA viruses from DNA viruses, retroviruses and human cells. DNA viruses cause diseases such as herpes, hepatitis B and papillomas (warts). The retrovirus HIV, or human immunodeficiency virus, causes AIDS. RNA viruses, however, are responsible for the majority of human viral diseases, causing a multitude of illnesses ranging from acute and chronic ailments to fatal infections. The following is a list of selected diseases caused by RNA viruses: 1 - ------------------------------------------------------------------------------- RNA Virus Diseases
Bronchiolitis Hemorrhagic fevers Rhinovirus common cold Bronchitis Hepatitis A, D and E RSV diseases Dengue fever Hepatitis C Rubella Diarrhea diseases Influenza Tick fevers Ebola fever Measles Viral meningitis Encephalitis Myocarditis Viral pharyngitis Hand-foot-and-mouth disease Neonatal enteroviral disease Viral respiratory infection Hantavirus pulmonary syn- drome Otitis media Yellow fever Hemorrhagic conjunctivitis Rabies
We have focused our current product development and discovery activities on the italicized diseases. - ------------------------------------------------------------------------------- Product Pipeline We are focusing our current product discovery and development activities on a number of RNA virus diseases affecting children and adults, including VRI, viral meningitis, hepatitis C and RSV diseases. The following chart sets forth these target disease indications and the status of our product candidates: - -------------------------------------------------------------------------------
Disease Indication Product Candidate Development Status - ------------------------------------------------------------------------------------------- Viral respi- Pleconaril ratory in- fection First Phase III trial in adolescents/adults ongoing Two Phase II trials in adolescents/adults completed Phase II trial in adolescents/adults with asthma completed Phase II challenge study completed Viral menin- Pleconaril gitis Phase III trial in children ongoing Phase III trial in adolescents/adults ongoing Phase II/III trial in children completed Phase II/III trial in adolescents/adults completed Phase II trial completed High risk Pleconaril Open label compassionate use ongoing picornavirus - diseases Hepatitis C VP 50406 Phase I trial ongoing RSV diseases VP 14637 Preclinical development
- ------------------------------------------------------------------------------- Pleconaril We currently are developing our most advanced product candidate, pleconaril, for the treatment of common diseases caused by picornaviruses. Picornaviruses are a large, very prevalent group of RNA viruses that are responsible for a significant portion of human disease caused by RNA viruses. Picornaviruses, particularly enteroviruses and rhinoviruses, are the predominant cause of VRI (a severe form of the common cold), viral meningitis, myocarditis, encephalitis, bronchitis, otitis media and neonatal enteroviral disease, as well as viral exacerbations in individuals with asthma and chronic obstructive pulmonary disease. Immunocompromised patients, including transplant patients and patients receiving chemotherapy, also are extremely susceptible to severe disease caused by picornavirus infections. Pleconaril is a proprietary, orally-administered small molecule inhibitor of picornaviruses that was discovered by scientists currently with ViroPharma. Pleconaril has been demonstrated to inhibit picornavirus replication in vitro by a novel, virus-specific mode of action. Pleconaril works by inhibiting the function of the viral protein coat, also known as the viral capsid, which is essential for virus infectivity and transmission. Preclinical studies have shown that pleconaril integrates within the picornavirus capsid at a specific site that is common to a majority of picornaviruses and disrupts several stages of the virus infection cycle. 2 We have developed liquid, solid, suspension and intranasal formulations of pleconaril. The liquid formulation has been used in all of our trials completed to date and is being used in our ongoing trials for viral meningitis. The solid formulation is being used in our ongoing VRI trial. Viral Respiratory Infection. In September 1999, we commenced the first of two planned Phase III studies of pleconaril for the treatment of respiratory illness caused predominantly by picornaviruses, which is often referred to as viral respiratory infection, or VRI. VRI is a severe form of the common cold characterized by sore throat, runny nose, cough, body aches and weakness. Currently, there are no antiviral pharmaceuticals for the treatment of VRI. However, physicians often prescribe antibiotics to patients with VRI. In fact, there are 18 million to 20 million antibiotic prescriptions written annually in the United States for patients suffering from the symptoms of VRI. Other than to prevent secondary bacterial infections, antibiotics are ineffective in treating viral diseases, including VRI. Therefore, many people afflicted with this illness seek relief from prescription and over-the-counter cough and cold remedies, analgesics and antipyretics. However, these medicines are only able to reduce the symptoms of VRI, and do not treat the underlying disease. In July 1999, we reported our preliminary analysis of data from our Phase II clinical program for pleconaril for the treatment of VRI. The program enrolled 1,501 patients in three double-blinded, placebo-controlled trials for VRI. The largest of the three studies enrolled 1,024 otherwise healthy adolescent and adult patients who received either 400 milligrams of pleconaril or placebo two times or three times daily. Based on our analysis of the data from this study, randomized patients who received 400 milligrams of pleconaril three times daily experienced a clinical benefit and a statistically significant reduction in their disease when compared to placebo. Specifically, these patients reported: . a 3.5 day reduction in the median time to complete elimination of disease symptoms from 14 days to 10.5 days (p = 0.009); . a 3.5 day reduction in the median time to patient overall wellness from 14 days to 10.5 days (p = 0.002); . a 1.5 day reduction in median time to elimination of nasal congestion (p = 0.030); . a 1.5 day reduction in median time to elimination of runny nose (p = 0.035); . a one day reduction in median time to elimination of sore throat (p = 0.008); and . no overall differences in adverse event profiles relative to placebo- treated patients. We designed our Phase III clinical program with pleconaril for the treatment of VRI based on the results of this study and data obtained from our two smaller studies. We expect this clinical program to include two Phase III double-blinded placebo-controlled clinical trials. In September 1999, we initiated our first Phase III clinical trial for VRI using 400 milligrams of pleconaril three times daily in otherwise healthy adolescent and adult patients. We expect to have preliminary results from the first Phase III clinical trial in VRI in the first half of 2000. Viral Meningitis. In July 1998, we commenced our Phase III clinical program with pleconaril for the treatment of viral meningitis in both adults and children between the ages of eight and 14 years. Meningitis is an infection of the central nervous system predominantly caused by enteroviruses, and is characterized by the abrupt onset of severe headache, stiffness of the neck or back, fever, muscle pain, nausea, vomiting and malaise. The disease generally requires emergency medical care and occasionally progresses to serious neurologic effects, particularly among infants. There are currently no antiviral pharmaceuticals for the treatment of viral meningitis. 3 We reported our preliminary analysis of data from our Phase II/III clinical program for viral meningitis in adolescents and adults in January 1999 and in pediatric patients in November 1998. The results for 130 adult patients treated with 200 milligrams of pleconaril or placebo three times daily were as follows: . a two day reduction in the median duration of headache for pleconaril- treated patients with confirmed enteroviral meningitis from nine to seven days (p = 0.04); . a one day reduction in the median duration of headache in all randomized patients from nine to eight days (p = 0.03); . a two day reduction in the median time for patients to return to work (p = 0.045); . a clinical benefit within 24 hours after initiation of therapy; and . no overall differences in adverse event profiles relative to placebo- treated patients. The results for 144 pediatric patients treated with 2.5 milligrams/kilogram of pleconaril or placebo three times daily were as follows: . a one day reduction in disease duration when measured by the elimination of major meningitis symptoms (p = 0.033); . a three day reduction in disease duration when measured by a caregiver's assessment of the patient's illness (p = 0.048); and . no overall differences in adverse event profiles relative to placebo- treated patients. While our analysis of the data from this pediatric study demonstrated a statistically significant reduction in disease duration when measured by headache in children between the ages of eight and 14 years, the data did not show a statistically significant reduction in the duration of headache for all children treated in this study. We believe that this result was due to the difficulty in assessing headache severity in children between the ages of four and seven years. The results for 76 children between the ages of eight and 14 years who received 2.5 milligrams/kilogram of pleconaril or placebo three times daily were as follows: . a one day reduction in disease duration when measured by headache (p = 0.029); . a three day reduction in disease duration when measured by the elimination of major meningitis symptoms (p = 0.045); and . no overall differences in adverse event profiles relative to placebo- treated patients. We designed our Phase III clinical program for pleconaril for the treatment of viral meningitis based on these studies. This clinical program, which commenced in July 1998, includes one Phase III double-blinded placebo- controlled clinical trial using 200 milligrams of pleconaril three times daily in otherwise healthy adolescent and adult patients, and one Phase III double- blinded placebo-controlled clinical trial using 2.5 milligrams/kilogram of pleconaril three times daily in otherwise healthy children between the ages of eight and 14 years. In addition, we are conducting a non-drug, natural history study of viral meningitis in children between the ages of four and seven years to further understand the disease in this population. We expect to have preliminary results from the two Phase III clinical trials in viral meningitis in the first half of 2000. High Risk Patients. Since August 1996, we have made pleconaril available on an open label basis for patients with life-threatening or seriously disabling diseases caused by picornaviruses. As of January 13, 2000, a total of 120 patients have been treated for a variety of life-threatening illnesses, including chronic meningoencephalitis in patients with immune deficiency, myocarditis, neonatal enteroviral disease, poliomyelitis syndromes, enterovirus infections after bone marrow transplantation, rhinovirus pneumonia, encephalitis, post-polio syndrome, chronic fatigue, enteroviral infection in patients with immune deficiency and enteroviral gastroenteritis in patients with immune deficiency. A majority of these high risk patients receiving a short course of pleconaril treatment have experienced a sustained clinical benefit and clearance of the virus. Although data from the compassionate use of 4 pleconaril in these patients will be included in our New Drug Application for viral meningitis, these data are typically not sufficient to support an independent label indication. Hepatitis C In February 2000, we commenced Phase I clinical studies on product candidate VP50406 for the treatment of hepatitis C due to the hepatitis C virus, commonly known as HCV. VP50406 is a proprietary, orally bioavailable small molecule that has been demonstrated to inhibit RNA replication of HCV in vitro. This compound is the lead compound in a chemical series discovered and developed by ViroPharma. We are conducting these Phase I studies as part of our collaboration with American Home Products Corporation under a collaboration and license agreement that we entered into with American Home Products Corporation in December 1999. In our collaboration with American Home Products Corporation, we also are continuing with the development of several additional potent, selective and chemically distinct compounds that inhibit several key HCV-encoded enzyme activities that are essential to viral RNA replication. HCV is recognized as a major cause of chronic hepatitis worldwide. Approximately 85% of persons infected with HCV develop chronic hepatitis, of which 20% progress to liver cirrhosis. Chronic HCV infection can also lead to the development of hepatocellular carcinoma and liver failure. RSV Diseases We currently are conducting preclinical toxicology studies on product candidate VP14637 for the treatment of diseases caused by respiratory syncytial virus, or RSV. VP14637 is a proprietary, small molecule that has been demonstrated to inhibit RSV replication in vitro. This compound is the lead compound in a chemical series discovered and developed by ViroPharma. We also are continuing with discovery and development activities of additional compounds that have selective activity against RSV. RSV is a major viral respiratory tract pathogen that often causes pneumonia and bronchiolitis. Infants and young children with underlying conditions such as prematurity, congenital heart disease, bronchopulmonary dysplasia and various congenital or acquired immunodeficiency syndromes (such as asthma or immunodeficiency resulting from bone marrow transplants) are at greatest risk of serious RSV morbidity and mortality. RSV is also a major cause of morbidity and mortality in the elderly. Certain patient groups are particularly at risk for suffering from serious and life-threatening complications arising from RSV infections. These groups include: . Bone marrow transplant patients; . Chronic obstructed pulmonary disease patients (including bronchitis and emphysema); and . Asthmatic patients. Treating RNA Virus Diseases The RNA Virus Replication Process Important to the successful discovery and development of antiviral pharmaceuticals is the ability to analyze the virus in a laboratory setting and to dissect the molecular and biochemical events critical to virus replication. The manipulation of RNA viruses and, in particular, the virus's RNA genome, requires special techniques and skills. Historically, technical limitations have hampered investigation of RNA virus replication. Consequently, the scientific community's understanding of the molecular events of RNA virus replication is incomplete. However, significant recent advancements in biological and molecular technologies related to the manipulation of RNA and RNA viruses have enabled us to pursue the discovery and development of effective treatments for RNA virus diseases. 5 We believe that the process of viral RNA uncoating and replication represents an attractive target for the therapeutic intervention in disease caused by RNA viruses. For RNA viruses to cause disease, they must replicate. Inhibiting RNA virus replication can prevent, limit or stop disease. In addition to thwarting disease, the direct inhibition of viral RNA uncoating and replication should reduce generation of drug-resistant virus offspring and decrease virus transmission from infected individuals to healthy persons. RNA replication is a complicated process involving several viral proteins that must act together in a coordinated fashion. Due to the nature of this process, changes or mutations in these proteins are not readily tolerated. Consequently, viral proteins required for RNA replication are not only specific to the virus, they are among the least variable proteins of the virus. This is in contrast to the highly variable viral surface proteins generally involved in immune responses to virus infections. This invariability of the viral proteins responsible for viral RNA replication represents an important attribute in their selection as molecular targets for antiviral product discovery and development. The ViroPharma Approach While the RNA uncoating and replication process is common among all RNA viruses, the detailed molecular and biochemical mechanisms involved currently are not fully understood. However, we have used our experience in RNA virology, RNA virus uncoating and RNA replication, along with recent advances in biological, molecular and informatics technologies, to gain an understanding of several aspects of the RNA virus uncoating and replication process. Scientists now with ViroPharma have elucidated fundamental processes involved in virus uncoating and have used this knowledge to design compounds to inhibit these processes. These scientists have also succeeded in discovering essential virus enzyme activities that are critical to RNA replication. They have further characterized RNA virus replication activities and have used the resulting information to develop novel drug screening assays. Our assays are optimized for high sensitivity and specificity and are validated for reproducibility. These assays are automated using state-of-the- art robotics technologies to facilitate the high throughput screening of large chemical libraries. Using our novel assays, we have discovered proprietary small molecule compounds that inhibit the targeted virus-specific activities. Once active compounds are identified, we advance such compounds to clinical product candidates through a process of chemical optimization. This process involves the rapid generation of an expanded chemical analog series based on the initial active compounds and utilizes an array of technologies including computer-assisted pharmacophore modeling and drug design techniques, two- dimensional and three-dimensional structure and substructure chemical database searches and conventional medicinal chemistry, combinatorial chemistry and automated high capacity chemical synthetic methods. We then evaluate analog series in various biochemical and biological assays that assess compound selectivity, potency, safety and bioavailability. Importantly, we chemically optimize active compounds for these four key parameters in parallel, not sequentially. We believe that our combination of chemical and biological technologies and our parallel compound optimization process allows us to accelerate product discovery and development. The generation of large numbers of specific chemical analogs by our scientists also enables us to rapidly expand our valuable chemical library in a manner that is biased toward inhibitors of enzymes and activities essential to RNA virus replication. We believe that this library provides a significant advantage in our efforts to discover novel inhibitors for additional RNA virus diseases. Manufacturing We currently do not have commercial manufacturing capabilities, and do not intend to develop such capabilities for any product in the near future. Our commercialization plans are to leverage the infrastructure of partners for the manufacturing and distribution of pleconaril and our other product candidates. Pleconaril drug substance is prepared from readily available materials using reliable processes. Both pleconaril and the technology used to manufacture it are proprietary and covered by the patents licensed to us by Sanofi- Synthelabo. In April 1997, we entered into a Development Agreement with SELOC France for the manufacture of pleconaril bulk drug substance and the development of a process for its commercial-scale production. In March 1998, we entered into an Addendum to the Development Agreement with SELOC France for the manufacture of validation batches of pleconaril bulk drug substance and the preparation of certain documentation that will be required in 6 connection with our New Drug Applications for pleconaril. We have entered into agreements with Patheon, Inc. for the manufacture of liquid and solid formulations of pleconaril drug product from bulk drug substance. We have not yet committed to a commercial supply agreement with any third party. We have developed liquid, solid, suspension and intranasal formulations of pleconaril. We have used a liquid formulation of pleconaril in all of our trials completed to date and the liquid formulation is being used in our ongoing trials for viral meningitis. We are using a solid formulation in our ongoing trial for pleconaril in the treatment of VRI. We anticipate that our current supply of pleconaril drug substance and drug product, together with the bulk drug substance and drug product that we will receive from our suppliers, will be sufficient to complete our formulation development activities and our ongoing clinical trials. We have established quality control guidelines, which require that third party manufacturers under contract produce the drug product in accordance with the FDA's current Good Manufacturing Practices requirements. We maintain confidentiality agreements with potential and existing manufacturers in order to protect our proprietary rights related to pleconaril. For the preparation of other compounds, we intend to contract with third- party manufacturers for preclinical research, manufacture of drug substances for clinical development and manufacture of drug products for commercial sale. Marketing and Sales Under our agreement with Sanofi-Synthelabo, we have the exclusive right to market and sell pleconaril for all enterovirus and rhinovirus indications in the United States and Canada. We are continuing our market research on the multiple disease indications for which we are developing pleconaril. Our marketing plans focus on medical education, including the use of thought leaders in peer-to-peer presentations at appropriate medical meetings. In addition, we have an extensive medical and scientific publications plan in place. We currently do not have a sales staff. We expect to build a focused antiviral sales force to launch pleconaril for the treatment of viral meningitis and high risk patients. To penetrate the VRI marketplace, however, we intend to identify a strategic partner to help us market pleconaril for the treatment of VRI to primary care physicians. The success and commercialization of our other potential products will be dependent, in part, upon our ability to enter into additional collaborative agreements for other potential products. There can be no assurance that we will be successful in developing a sales force, entering into collaborative arrangements, penetrating the markets for any proposed products or achieving market acceptance of our products. There can be no assurance that any such marketing arrangements will be available on terms acceptable to us, if at all, that such third parties would perform adequately their obligations as expected, or that any revenue would be derived from such arrangements. Strategic Relationships Sanofi-Synthelabo Pleconaril was discovered by scientists currently with ViroPharma while they were with Sterling Winthrop, Inc., now Sanofi-Synthelabo S.A. In December 1995, we entered into an agreement with Sanofi-Synthelabo under which we received exclusive rights under patents owned by Sanofi-Synthelabo to develop and market all products relating to pleconaril and related compounds for use in enterovirus and rhinovirus disease indications in the United States and Canada, as well as a right of first refusal for any other indications in the United States and Canada. Our rights include rights to use all of Sanofi- Synthelabo's patents, know-how and trademarks relating to pleconaril for those indications in the United States and Canada. We have the right to sublicense our rights under the agreement subject to Sanofi-Synthelabo's consent, which consent is not to be unreasonably withheld. 7 Pleconaril, which is currently in clinical trials, is covered by one of the licensed United States patents, which expires in 2012, and one of the licensed Canadian patent applications. We will be dependent on Sanofi-Synthelabo to prosecute such patent applications and may be dependent on Sanofi-Synthelabo to protect such patent rights. Under our agreement with Sanofi-Synthelabo, we are required to make milestone payments to Sanofi-Synthelabo upon the achievement of certain development milestones and, until the expiration or termination of the agreement, royalty payments on any sales of products developed under the agreement in the United States and Canada, which royalty payments will be reduced upon the expiration of the last patent on pleconaril or any related drug. We would receive royalties from Sanofi-Synthelabo on sales of products by Sanofi-Synthelabo outside the United States and Canada. We believe that the royalty rates payable by both Sanofi-Synthelabo and us are comparable to the rates generally payable by other companies under similar arrangements. The milestone events generally include regulatory submissions of new drug applications and regulatory approvals in various jurisdictions. These milestones, however, may never be attained. Sanofi-Synthelabo must reimburse certain of the milestone fees previously paid by us upon submission of pleconaril for regulatory approval in Japan. Also, if foreign regulatory authorities require significant additional testing of pleconaril for use in the European Union, we will be required to conduct such studies at our own expense. Our agreement with Sanofi-Synthelabo terminates on the later of expiration of the last patent licensed to us under the agreement or ten years following our first sale of a product containing a compound licensed to us under the agreement in the United States or Canada, or earlier under certain circumstances. In the event of such a termination, we may be subject to restrictions under the agreement on our ability to market pleconaril and compete with Sanofi-Synthelabo. In addition, Sanofi-Synthelabo has the right to terminate the agreement if we are subject to a change of control that would materially and adversely affect the development, manufacturing and marketing of the products under the agreement. The term automatically renews for successive five-year terms unless six months' prior written notice of termination is given by either party. We also have the right to manufacture, or contract with third parties to manufacture, any drug product derived from the pleconaril drug substance. American Home Products Corporation In December 1999, we entered into a collaboration and license agreement with American Home Products Corporation to jointly develop products for use in treating hepatitis C due to the hepatitis C virus in humans. Under the agreement, we licensed to American Home Products worldwide rights under patents and know-how owned by us or created under the agreement. We have the right to co-promote these products in the United States and Canada and American Home Products will promote the products elsewhere in the world. During the initial research phase of the agreement, the two parties will work together exclusively on the development of small molecule compounds directed against certain HCV targets. For the entire term of the agreement the two parties will work together exclusively on any promising compounds. Under the agreement, American Home Products has the right to manufacture any commercial products developed under the agreement. American Home Products paid us $5.0 million on the effective date of the agreement, and is obligated to make milestone payments to us, and purchase shares of our common stock at a premium to the market price, upon the achievement of certain development milestones. The milestone events generally include successful completion of steps in the clinical development of an HCV product and the submission for, and receipt of, marketing approval for the product in the United States and abroad. These milestones, however, may never be attained. American Home Products Corporation will provide significant financial support for the development of an HCV therapeutic compound. Until the expiration or termination of the agreement, any profits from the sale of products developed under the agreement and sold in the United States and Canada will be shared equally between us and American Home 8 Products, subject to adjustment under certain circumstances. For sales of these products outside the United States and Canada, American Home Products will make royalty payments to us. These royalty payments will be reduced upon the expiration of the last of our patents covering those products. The collaborative research component of our agreement with American Home Products has an initial term of three years after the effective date of the agreement, unless extended by mutual agreement. Our agreement with American Home Products terminates, country-by-country, in the United States and Canada, if the parties are no longer co-promoting any product developed under the agreement, and outside the United States and Canada, when American Home Products is no longer obligated to pay us royalties on sales of products developed under the agreement. Battelle Memorial Institute In November 1999, we entered into a product development and commercialization agreement with Battelle Memorial Institute in connection with our RSV program. Under this agreement, we received, subject to certain conditions, certain exclusive rights to use patents and know-how owned or controlled by Battelle or developed under the agreement covering Battelle's hand-held, inhalation device for the delivery of compounds to treat RSV. We will pay Battelle for development activities that it will perform on our behalf on a fee-for-service basis. Battelle also is entitled to milestone payments upon achievement of certain events relating to clinical development and regulatory approval. We will pay Battelle royalties on net sales of products, subject to certain minimum amounts due. Royalties will be reduced as to sales in any country in which no issued patent protects the Battelle device. Other Collaborative Agreements In August 1998, our Collaborative Research Agreement (the "Collaboration Agreement") with Boehringer Ingelheim Pharmaceuticals, Inc. ("BI") expired. We entered into an agreement with BI, effective as of the expiration of the Collaboration Agreement, that permits each of the parties to continue the development of all compounds that each party brought to the collaboration, and all inventions jointly discovered by the parties during the term of the Collaboration Agreement, without obligation to compensate the other party. In October 1997, we received $1,000,000 from BI as an advance on a future milestone in connection with the agreement. Such amount will be due and payable in August 2000. The advance bears interest at 8.5% and is evidenced by a convertible promissory note. If amounts due under the note are not paid as described in the note, BI may convert the then outstanding principal balance and accrued interest thereon into shares of our Common Stock based on the last sale price of such Common Stock on the date immediately prior to the date on which we are notified of BI's intention to convert the promissory note. Patents and Proprietary Technology We believe that patent protection and trade secret protection are important to our business and that our future will depend, in part, on our ability to maintain our technology licenses, maintain trade secret protection, obtain patents and operate without infringing the proprietary rights of others both in the United States and abroad. We currently have received two issued United States patents covering compounds, compositions and methods for treating hepatitis C, one issued United States patent covering methods for treating pestivirus disease (a disease caused by viruses related to HCV) and three issued United States patents for compounds, compositions or methods for treating influenza. We have three pending United States patent applications covering compounds and methods for treating RSV diseases and influenza, as well as six United States patent applications covering compounds and methods for treating hepatitis C and related virus diseases, as well as compounds active against pestivirus diseases. We have two pending United States patent applications covering technology and methods for identifying inhibitors of HCV. We also have filed patent applications under the Patent Cooperation Treaty, or PCT. These patent applications cover compounds and methods for treating hepatitis C and related virus diseases, 9 pestivirus diseases, RSV diseases and influenza and technology, compositions and methods for identifying inhibitors of HCV. We intend to seek patent protection on these inventions in countries having significant market potential around the world on the basis of our PCT filings. As patent applications in the United States are maintained in secrecy until patents issue and as publication of discoveries in the scientific or patent literature often lags behind the actual discoveries, we cannot be certain that we or our licensors were the first to make the inventions covered by each of these pending patent applications or that we or our licensors were the first to file patent applications for such inventions. Furthermore, the patent positions of biotechnology and pharmaceutical companies are highly uncertain and involve complex legal and factual questions, and, therefore, the breadth of claims allowed in biotechnology and pharmaceutical patents or their enforceability cannot be predicted. We cannot be sure that any patents will issue from any of these patent applications or, should any patents issue, that we will be provided with adequate protection against potentially competitive products. Furthermore, we cannot be sure that should patents issue, they will be of commercial value to us, or that private parties, including competitors, will not successfully challenge these patents or circumvent our patent position in the United States or abroad. In the absence of adequate patent protection, our business may be adversely affected by competitors who develop comparable technology or products. Pursuant to the terms of the Uruguay Round Agreements Act, patents filed on or after June 8, 1995 have a term of twenty years from the date of filing, irrespective of the period of time it may take for the patent to ultimately issue. This may shorten the period of patent protection afforded to our products as patent applications in the biopharmaceutical sector often take considerable time to issue. Under the Drug Price Competition and Patent Term Restoration Act of 1984, a sponsor may obtain marketing exclusivity for a period of time following Food and Drug Administration approval of certain drug applications, regardless of patent status, if the drug is a new chemical entity or if new clinical studies were used to support the marketing application for the drug. Pursuant to the FDA Modernization Act of 1997, this period of exclusivity can be extended if the applicant performs certain studies in pediatric patients. This marketing exclusivity prevents a third party from obtaining FDA approval for a similar or identical drug under an Abbreviated New Drug Application or a "505(b)(2)" New Drug Application. The Drug Price Competition and Patent Term Restoration Act of 1984 also allows a patent owner to obtain an extension of applicable patent terms for a period equal to one-half the period of time elapsed between the filing of an Investigational New Drug Application and the filing of the corresponding New Drug Application plus the period of time between the filing of the New Drug Application and FDA approval, with a five year maximum patent extension. We cannot be sure that we will be able to take advantage of either the patent term extension or marketing exclusivity provisions of this law. In order to protect the confidentiality of our technology, including trade secrets and know-how and other proprietary technical and business information, we require all of our employees, consultants, advisors and collaborators to enter into confidentiality agreements that prohibit the use or disclosure of confidential information. The agreements also oblige our employees, consultants, advisors and collaborators to assign to us ideas, developments, discoveries and inventions made by such persons in connection with their work with us. We cannot be sure that these agreements will maintain confidentiality, will prevent disclosure, or will protect our proprietary information or intellectual property, or that others will not independently develop substantially equivalent proprietary information or intellectual property. The pharmaceutical industry is highly competitive and patents have been applied for by, and issued to, other parties relating to products competitive with those being developed by us. Therefore, our product candidates may give rise to claims that they infringe the patents or proprietary rights of other parties existing now and in the future. Furthermore, to the extent that we, or our consultants or research collaborators, use intellectual property owned by others in work performed for us, disputes may also arise as to the rights in such intellectual property or in related or resulting know-how and inventions. An adverse claim could subject us to significant liabilities to such other parties and/or require disputed rights to be licensed from such other parties. A license required under any such patents or proprietary rights may not be available to us, or may not be available on acceptable terms. If 10 we do not obtain such licenses, we may encounter delays in product market introductions, or may find that we are prevented from the development, manufacture or sale of products requiring such licenses. In addition, we could incur substantial costs in defending ourselves in legal proceedings instituted before the United States Patent and Trademark Office or in a suit brought against us by a private party based on such patents or proprietary rights, or in a suit by us asserting our patent or proprietary rights against another party, even if the outcome is not adverse to us. Government Regulation The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements on the clinical development, manufacture and marketing of pharmaceutical products. These agencies and other federal, state and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval and promotion of our products. All of our products will require regulatory approval before commercialization. In particular, therapeutic products for human use are subject to rigorous preclinical and clinical testing and other requirements of the Federal Food, Drug, and Cosmetic Act, implemented by the FDA, as well as similar statutory and regulatory requirements of foreign countries. Obtaining these marketing approvals and subsequently complying with ongoing statutory and regulatory requirements is costly and time consuming. Any failure by us or our collaborators, licensors or licensees to obtain, or any delay in obtaining, regulatory approval or in complying with other requirements, could adversely affect the commercialization of products then being developed by us and our ability to receive product or royalty revenues. The steps required before a new drug product may be distributed commercially in the United States generally include: . conducting appropriate preclinical laboratory evaluations of the product's chemistry, formulation and stability, and animal studies to assess the potential safety and efficacy of the product; . submitting the results of these evaluations and tests to the FDA, along with manufacturing information and analytical data, in an Investigational New Drug Application, or IND; . making the Investigational New Drug Application effective after the resolution of any safety or regulatory concerns of FDA; . obtaining approval of Institutional Review Boards, or IRBs, to introduce the drug into humans in clinical studies; . conducting adequate and well-controlled human clinical trials that establish the safety and efficacy of the drug product candidate for the intended use, typically in the following three sequential, or slightly overlapping stages: . Phase I: The drug is initially introduced into healthy human subjects or patients and tested for safety, dose tolerance, absorption, metabolism, distribution and excretion; . Phase II: The drug is studied in patients to identify possible adverse effects and safety risks, to determine dose tolerance and the optimal dosage, and to collect initial efficacy data; . Phase III: The drug is studied in an expanded patient population at multiple clinical study sites, to confirm efficacy and safety at the optimized dose, by measuring a primary endpoint established at the outset of the study; . submitting the results of preliminary research, preclinical studies, and clinical studies as well as chemistry, manufacturing and control information on the drug to the FDA in a New Drug Application, or NDA; and . obtaining FDA approval of the New Drug Application prior to any commercial sale or shipment of the drug product. 11 This process can take a number of years and often requires substantial financial resources. The results of preclinical studies and initial clinical trials are not necessarily predictive of the results from large-scale clinical trials, and clinical trials may be subject to additional costs, delays or modifications due to a number of factors, including the difficulty in obtaining enough patients, clinical investigators, drug supply, or financial support. The FDA has issued regulations intended to accelerate the approval process for the development, evaluation and marketing of new therapeutic products intended to treat life-threatening or severely debilitating diseases, especially where no alternative therapies exist. If applicable, this procedure may shorten the traditional product development process in the United States. Similarly, products that represent a substantial improvement over existing therapies may be eligible for priority review with a target review and approval time of six months. Nonetheless, approval may be denied or delayed by FDA or additional trials may be required. FDA also may require testing and surveillance programs to monitor the effect of approved products that have been commercialized, and the agency has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs. Upon approval, a drug product may be marketed only in those dosage forms and for those indications approved in the New Drug Application, although information may be distributed about off-label indications in certain circumstances. In addition to obtaining FDA approval for each indication to be treated with each product, each domestic drug product manufacturing establishment must register with the FDA, list its drug products with the FDA, comply with current Good Manufacturing Practices and permit and pass inspections by the FDA. Moreover, the submission of applications for approval may require additional time to complete manufacturing stability studies. Foreign establishments manufacturing drug products for distribution in the United States also must list their products with the FDA and comply with current Good Manufacturing Practices. They also are subject to periodic inspection by the FDA or by local authorities under agreement with the FDA. Any products manufactured or distributed by us pursuant to FDA approvals are subject to extensive continuing regulation by the FDA, including record- keeping requirements and a requirement to report adverse experiences with the drug. In addition to continued compliance with standard regulatory requirements, the FDA also may require post-marketing testing and surveillance to monitor the safety and efficacy of the marketed product. Adverse experiences with the product must be reported to the FDA. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product are discovered following approval. The Federal Food, Drug, and Cosmetic Act also mandates that drug products be manufactured consistent with current Good Manufacturing Practices. In complying with the FDA's regulations on current Good Manufacturing Practices, manufacturers must continue to spend time, money and effort in production, recordkeeping, quality control, and auditing to ensure that the marketed product meets applicable specifications and other requirements. The FDA periodically inspects drug product manufacturing facilities to ensure compliance with current Good Manufacturing Practices. Failure to comply subjects the manufacturer to possible FDA action, such as warning letters, suspension of manufacturing, seizure of the product, voluntary recall of a product or injunctive action, as well as possible civil penalties. We currently rely on, and intend to continue to rely on, third parties to manufacture our compounds and products. Such third parties will be required to comply with current Good Manufacturing Practices. Even after FDA approval has been obtained, and often as a condition to expedited approval, further studies, including post-marketing studies, may be required. Results of post-marketing studies may limit or expand the further marketing of the products. If we propose any modifications to the product, including changes in indication, manufacturing process, manufacturing facility or labeling, a New Drug Application supplement may be required to be submitted to the FDA. Products manufactured in the United States for distribution abroad will be subject to FDA regulations regarding export, as well as to the requirements of the country to which they are shipped. These latter requirements are likely to cover the conduct of clinical trials, the submission of marketing applications, and all aspects of product manufacture and marketing. Such requirements can vary significantly from country to 12 country. As part of our strategic relationships our collaborators may be responsible for the foreign regulatory approval process of our products, although we may be legally liable for noncompliance. We are also subject to various federal, state and local laws, rules, regulations and policies relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our research work. Although we believe that our safety procedures for handling and disposing of such materials comply with current federal, state and local laws, rules, regulations and policies, the risk of accidental injury or contamination from these materials cannot be entirely eliminated. The extent of government regulation which might result from future legislation or administrative action cannot be accurately predicted. In this regard, although the Food and Drug Administration Modernization Act of 1997 modified and created requirements and standards under the Federal Food, Drug, and Cosmetic Act with the intent of facilitating product development and marketing, the FDA is still in the process of developing regulations implementing the Food and Drug Administration Modernization Act of 1997. Consequently, the actual effect of these developments on our business is uncertain and unpredictable. Moreover, we anticipate that Congress, state legislatures and the private sector will continue to review and assess controls on health care spending. Any such proposed or actual changes could cause us or our collaborators to limit or eliminate spending on development projects and may otherwise impact us. We cannot predict the likelihood, nature, or extent of adverse governmental regulation that might result from future legislative or administrative action, either in the United States or abroad. Additionally, in both domestic and foreign markets, sales of our proposed products will depend, in part, upon the availability of reimbursement from third-party payors, such as government health administration authorities, managed care providers, private health insurers and other organizations. Significant uncertainty often exists as to the reimbursement status of newly approved health care products. In addition, third-party payors are increasingly challenging the price and cost effectiveness of medical products and services. There can be no assurance that our proposed products will be considered cost-effective or that adequate third-party reimbursement will be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product research and development. Competition The pharmaceutical and biopharmaceutical industries are intensely competitive and are characterized by rapid technological progress. Certain pharmaceutical and biopharmaceutical companies and academic and research organizations currently engage in, or have engaged in, efforts related to the discovery and development of new antiviral medicines. Significant levels of research in chemistry and biotechnology occur in universities and other nonprofit research institutions. These entities have become increasingly active in seeking patent protection and licensing revenues for their research results. They also compete with us in recruiting skilled scientific talent. Antiviral therapeutics for certain RNA virus diseases are currently available. For example: . zanamivir and oseltamivir phosphate are used to treat influenza due to influenza A and B viruses; . amantadine and rimantadine are used to treat influenza A virus infections; . ribavirin is used to treat serious respiratory disease caused by RSV; and . interferon, alone or in combination with ribavirin, is used to treat hepatitis C. Two specific immunoglobulin products, one an intravenous human plasma- derived immune globulin preparation and the other an injectable humanized monoclonal antibody (palivizumab), currently are approved for prophylactic use in certain high risk infants with RSV infections. In addition, several standard immunoglobulin products are used to treat or prevent some RNA virus diseases. We believe, however, that based on the characteristics of existing treatments, there is a clear need for new agents with superior therapeutic efficacy to treat these viral diseases. 13 In addition to approved products, other companies are developing treatments for RNA virus diseases, including compounds in clinical development for rhinovirus, HCV and influenza infections. Moreover, there are compounds in preclinical and clinical studies for rhinovirus, HCV, RSV and influenza infections. Our ability to compete successfully will be based on our ability to: . create and maintain scientifically advanced technology, . develop proprietary products, . attract and retain scientific personnel, . obtain patent or other protection for our products, . obtain required regulatory approvals and manufacture, and . successfully market our products either alone or through outside parties. Some of our competitors have substantially greater financial, research and development, manufacturing, marketing and human resources and greater experience in product discovery, development, clinical trial management, FDA regulatory review, manufacturing and marketing than we do. Human Resources As of January 31, 2000, we had 107 full-time employees, including 21 persons with Ph.D. or M.D. degrees. Seventy-five of our employees are engaged in research and development activities at our laboratory facility in Exton, Pennsylvania. A significant number of our management and professional employees have had prior experience with pharmaceutical, biotechnology or medical products companies. None of our employees is covered by collective bargaining agreements. We believe that our relations with our employees are good. Risk Factors Our disclosure and analysis in this report contains some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to present or anticipated scientific progress, development of potential pharmaceutical products, future revenues, capital expenditures, research and development expenditures, future financings and collaborations, personnel, manufacturing requirements and capabilities, and other statements regarding matters that are not historical facts or statements of current condition. Any or all of our forward-looking statements in this report may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. The risks described below are not the only ones facing our company. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations. We do not intend to update our forward-looking statements to reflect future events or developments. We depend heavily on the success of our lead product candidate, pleconaril, which is still in clinical trials and may never be approved for commercial use. If we are unable to commercialize pleconaril, our business and results of operations will be harmed. We have invested a significant portion of our time and financial resources since our inception in the development of pleconaril and anticipate that for the foreseeable future our ability to achieve profitability will be solely dependent on its successful commercialization. We expect to have preliminary results from the first Phase III clinical trial in VRI and the two Phase III clinical trials in viral meningitis, in the first half of 2000. If these trials do not show that pleconaril is safe and effective, our stock price and results of operations will be 14 materially and adversely affected. Many factors could negatively affect the success of our efforts to develop and commercialize pleconaril, including: . significant delays in our clinical trials; . significant increases in the costs of our clinical trials; . negative, inconclusive or otherwise unfavorable results from our clinical trials; . an inability to obtain, or delay in obtaining, regulatory approval for the commercialization of pleconaril; . an inability to manufacture pleconaril in commercial quantities at acceptable cost; and . a failure to achieve market acceptance of pleconaril. . If we are unable to commercialize pleconaril, our business and results of operations will be harmed. If we are unable to commercialize pleconaril, our business and results of operations will be harmed. We have incurred losses since inception and anticipate that we will incur continued losses for the foreseeable future. We do not have a current source of product revenue and may never be profitable. We are a development stage company with no current source of product revenue. We have incurred losses in each year since our inception in 1994. As of December 31, 1999, we had an accumulated deficit of approximately $77.9 million. We do not know when or if we will achieve product revenue. We expect to incur such losses at an increasing rate over at least the next several years, primarily due to expected increases in our research and development expenses, further clinical trials of our most advanced product candidate, pleconaril (including any significant additional studies for approval in the European Union, if any are required), and milestone payments that may be payable under the terms of our agreement with Sanofi-Synthelabo for pleconaril. Also, we expect to incur expenses related to our marketing and market research activities for pleconaril, our development of a marketing and sales staff and building the requisite infrastructure, and further research and development related to other product candidates. Our ability to achieve profitability is dependent on a number of factors, including our ability to develop and obtain regulatory approvals for our product candidates, successfully commercialize those product candidates, which may include entering into collaborative agreements for product development and commercialization, and secure contract manufacturing and distribution and logistics services. We do not know when or if we will complete our product development efforts, receive regulatory approval of any of our product candidates or successfully commercialize any approved products. As a result, we are unable to predict the extent of any future losses or the time required to achieve profitability, if at all. Our long term success depends upon our ability to develop additional drug product candidates. If our drug discovery and development programs are not successful, our business and results of operations will be harmed. We are performing clinical and preclinical research on product candidates for the treatment of hepatitis C , and preclinical research on product candidates for the treatment of RSV diseases. We also are seeking to discover additional product candidates for the treatment of these and other RNA virus diseases. Drug discovery and research for RNA virus diseases is a new and challenging area. We cannot be certain that our efforts in this regard will lead to commercially viable products. Moreover, we have not submitted Investigational New Drug Applications, or INDs, for these products, which are required before we can begin clinical trials on the products in the United States. We are not sure that we will submit INDs for the treatment of hepatitis C and RSV as planned, or whether FDA will permit us to proceed with clinical trials. These product candidates are in the early stages of development, and we may abandon further development efforts before the products reach clinical trials. We do not know what the cost to manufacture these products in commercial quantities will be, or the dose required to treat patients. We do not know whether any of these early-stage development products ultimately will be shown to be safe and effective. Moreover, governmental authorities may enact new legislation or regulations that could limit or restrict our development efforts. If we are unable to successfully discover new product candidates or develop our early-stage product candidates, our business and results of operations will be harmed. 15 None of our product candidates is approved for commercial use. If our product candidates do not receive regulatory approval, or if we are unable to maintain regulatory compliance, we will be limited in our ability to commercialize these products, and our business and results of operations will be harmed. We have not received regulatory approval to commercialize pleconaril or any of our other product candidates. We will need to complete preclinical and clinical testing of each of our product candidates before submitting marketing applications. Negative, inconclusive or inconsistent clinical trial results could prevent regulatory approval, increase the cost and timing of regulatory approval or require additional studies or a filing for a narrower indication. FDA recently enacted new regulations requiring the development and submission of pediatric use data for new drug products. Our failure to obtain this data, or to obtain a delay of, or exemption from, this requirement could adversely affect our chances of receiving regulatory approval, or could result in regulatory or legal enforcement actions. The development of any of our product candidates is subject to many risks, including the risk that: . the product candidate is found to be ineffective or unsafe; . the clinical test results for a product candidate delay or prevent regulatory approval; . the product candidate cannot be developed into a commercially viable product; . the product candidate is difficult to manufacture; . the product candidate later is discovered to cause adverse effects that prevent widespread use, require withdrawal from the market, or serve as the basis for product liability claims; . third party competitors hold proprietary rights that preclude us from marketing the product; and . third party competitors market a more clinically effective or more cost-effective product. Even if we believe that clinical data demonstrate the safety and efficacy of our product, regulators may disagree with us, which could delay, limit or prevent the approval of our product candidates. As a result, we may not obtain the labeling claims we believe are necessary or desirable for the promotion of those products. In addition, regulatory approval may take longer than we expect as a result of a number of factors, including failure to qualify for priority review of our application. For example, the regulatory approval process may delay the launch of pleconaril for the treatment of viral meningitis beyond the year 2000. All statutes and regulations governing the approval of our product candidates are subject to change in the future. These changes may increase the time or cost of regulatory approval, limit approval, or prevent it completely. Even if we receive regulatory approval for our product candidates, the later discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions, including withdrawal of the product from the market. Approval of a product candidate may be conditioned upon certain limitations and restrictions as to the drug's use, or upon the conduct of further studies, and may be subject to continuous review. After approval of a product, we will have significant ongoing regulatory compliance obligations, and if we fail to comply with these requirements, we could be subject to penalties, including: . warning letters; . fines; . product recalls; . withdrawal of regulatory approval; . operating restrictions; . injunctions; and . criminal prosecution. If we are unable to commercialize our products as anticipated, our business and results of operations will be harmed. Our license with Sanofi-Synthelabo makes Sanofi-Synthelabo responsible for seeking regulatory approval for and marketing pleconaril outside the United States and Canada. If Sanofi- Synthelabo fails to diligently and successfully pursue these activities, our business and results of operations will be harmed. 16 We will need to conduct clinical studies of all of our product candidates. These studies are costly, time consuming and unpredictable. Any unanticipated costs or delays in our clinical studies could harm our business, financial condition and results of operations. Our lead candidate, pleconaril, is in Phase III trials for treatment of VRI and viral meningitis. We have other product candidates for treatment of hepatitis C in clinical development and for RSV disease in preclinical development. We must complete significant research and development, laboratory testing, and clinical testing on these product candidates before we submit marketing applications in the United States and abroad. These studies and trials can be very costly and time-consuming. In addition, we rely on third party contract research organizations to perform significant aspects of our studies and clinical trials, introducing additional sources of risk into our program. The rate of completion of clinical trials depends upon many factors, including the rate of enrollment of patients. The acute nature of our disease targets, the fact that some of these diseases have peak incidence rates during certain times of the year, and the difficulties in anticipating where disease outbreaks will occur, may affect patient enrollment in our clinical trials. If we are unable to accrue sufficient clinical patients during the appropriate period, we may need to delay our clinical trials and incur significant additional costs. In addition FDA or Institutional Review Boards may require us to delay, restrict, or discontinue our clinical trials on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. Even if we complete our current Phase III clinical trials, we may desire or be required to conduct additional clinical trials of pleconaril prior to commercialization. In addition, we may be unable to submit a New Drug Application to the FDA within the timeframe we currently expect. If submitted, a New Drug Application would require FDA approval before we could commercialize the product described in the application. The cost of human clinical trials varies dramatically based on a number of factors, including: . the order and timing of clinical indications pursued; . the extent of development and financial support from corporate collaborators; . the number of patients required for enrollment; . the difficulty of obtaining clinical supplies of the product candidate; and . the difficulty in obtaining sufficient patient populations and clinicians. All statutes and regulations governing the conduct of clinical trials are subject to change in the future, which could affect the cost of our clinical trials. Any unanticipated costs or delays in our clinical studies could harm our business, financial condition and results of operations. Even if we obtain positive preclinical or clinical trial results initially, future clinical trial results may not be similarly positive. As a result, ongoing and contemplated clinical testing, if permitted by governmental authorities, may not demonstrate that a product candidate is safe and effective in the patient population and for the disease indications for which we believe it will be commercially advantageous to market the product. The failure of our clinical trials to demonstrate the safety and efficacy of our desired indications could harm our business, financial condition and results of operations. We do not have any marketing or sales experience and will need to develop marketing and sales capabilities to successfully commercialize our product candidates. If we are unable to do so, our business and results of operations will be harmed. We currently are developing a marketing staff and do not have a sales staff. We will need both staffs to successfully commercialize any of our product candidates, including pleconaril. We intend to establish a specialty sales force for viral meningitis and to use a third-party sales and marketing partner for VRI. Once established, we intend to expand our specialty sales force to allow us to maximize our return in a co-promotion partnership for VRI. The development of a marketing and sales capability will require significant expenditures, management resources and time. We may be unable to build such a sales force, the cost of establishing such a sales force may exceed any product revenues, or our marketing and sales efforts may be unsuccessful. We may 17 not be able to find a suitable sales and marketing partner for VRI. If we are unable to successfully establish a sales and marketing capability in a timely manner or find suitable sales and marketing partners, our business and results of operations will be harmed. Even if we are able to develop a sales force or find a suitable marketing partner, we may not successfully penetrate the markets for any of our proposed products. We currently depend and will in the future depend on third parties to manufacture our products and product candidates, including pleconaril. If these manufacturers fail to meet our requirements and the requirements of regulatory authorities, our business, financial condition and results of operations will be harmed. We do not have the internal capability to manufacture commercial quantities of pharmaceutical products under the FDA's current Good Manufacturing Practices. We entered into agreements with SELOC France for the manufacture of pleconaril bulk drug substance and the development of a process for commercial scale production of pleconaril. In addition, SELOC France will assist us in the preparation of certain documentation that will be required in connection with our New Drug Application for pleconaril. We also have entered into agreements with Patheon, Inc. for the manufacture of oral liquid and solid formulations of pleconaril drug product. Other than the production of validation batches, these manufacturers have not delivered commercial quantities of pleconaril bulk drug substance or drug product to us yet, and we cannot be certain that they will be able to deliver commercial quantities of pleconaril bulk drug substance or drug product on a timely basis. If SELOC France or Patheon, Inc. is unable to satisfy our requirements and we are required to find an additional or alternative source of supply, there may be additional cost and delay in product development and commercialization of pleconaril. We are also evaluating manufacturing alternatives for the commercial manufacture of drug substance and drug product. The FDA requires pre-approval inspection for all commercial manufacturing sites. We may not be able to identify and qualify alternative manufacturers on a timely basis, if at all. We have used an oral liquid formulation of pleconaril in all of our clinical trials completed to date, and in our ongoing clinical trials for viral meningitis. We are using an oral solid formulation in our ongoing Phase III clinical trial of pleconaril for the treatment of VRI. We have also developed suspension and intranasal formulations of pleconaril. A delay in manufacturing validation batches, or a failure to negotiate agreements with manufacturers, will delay product development and commercialization and could harm our business, financial condition and results of operations. The chemical stability of the oral solid formulation must be tested. We also may need to demonstrate that the oral solid formulation is bioequivalent to the oral liquid formulation. A delay in the required stability testing or in manufacturing validation batches, or a failure to demonstrate chemical stability or any required bioequivalence will prevent or delay the commercialization of the oral solid formulation of pleconaril. The suspension and intranasal formulations of pleconaril have not been used in any of our clinical trials to date. Any contract manufacturers that we may use must adhere to the FDA's regulations on current Good Manufacturing Practices, which are enforced by the FDA through its facilities inspection program. These facilities must pass a plant inspection before the FDA will issue a pre-market approval of the product. The manufacture of product at these facilities will be subject to strict quality control, testing and recordkeeping requirements. Moreover, while we may choose to manufacture products in the future, we have no experience in the manufacture of pharmaceutical products for clinical trials or commercial purposes. If we decide to manufacture products, we would be subject to the regulatory requirements described above. In addition, we would require substantial additional capital and would be subject to delays or difficulties encountered in manufacturing pharmaceutical products. No matter who manufacturers the product, we will be subject to continuing obligations regarding the submission of safety reports and other post-market information. If we encounter delays or difficulties with contract manufacturers, packagers or distributors, market introduction and subsequent sales of our products could be delayed. In addition, we may need to seek alternative sources of supply. If so, we may incur additional costs or delays in product commercialization. If we change the 18 source or location of supply or modify the manufacturing process, regulatory authorities will require us to demonstrate that the product produced by the new source or from the modified process is equivalent to the product used in any clinical trials that we had conducted. We may not be able to enter into alternative supply arrangements at commercially acceptable rates, if at all. Moreover, the manufacturers utilized by us may not provide quantities of product sufficient to meet our specifications or our delivery, cost and other requirements. We license patented technology and other proprietary rights from Sanofi- Synthelabo, including rights to pleconaril. If Sanofi-Synthelabo does not protect our rights under our license agreement with it or does not reasonably consent to our sublicense of rights to pleconaril, or if this license agreement is terminated, our business and results of operations would be harmed. We have licensed from Sanofi-Synthelabo the exclusive United States and Canadian rights to antiviral agents for use in enterovirus and rhinovirus indications, which are the subject of two issued United States patents and two related Canadian patent applications owned by Sanofi-Synthelabo that cover both pleconaril and technology used to manufacture pleconaril. We depend on Sanofi-Synthelabo to prosecute such patent applications and protect such patent rights. Failure by Sanofi-Synthelabo to prosecute such applications and protect such patent rights could harm our business. Our ability to sublicense our rights under this license agreement are subject to Sanofi-Synthelabo's consent, which is not to be unreasonably withheld. Under our license agreement, Sanofi-Synthelabo also has exclusive rights to market and sell products covered by these patents and patent applications in countries other than the United States and Canada, although we would receive royalties from Sanofi-Synthelabo on such sales. In connection with these rights, Sanofi- Synthelabo may require us to pay for clinical trials required for products to receive regulatory approval in the European Union if significant additional testing is required. If Sanofi-Synthelabo does not successfully market and sell products outside of the United States and Canada, our business and future results of operations may be harmed. If our license agreement with Sanofi- Synthelabo is terminated, our business and results of operations would be harmed. We depend on collaborations with third parties, which may reduce our product revenues or restrict our ability to commercialize products. We have entered into, and may in the future enter into, sales and marketing, distribution, manufacturing, development, licensing and other strategic arrangements with third parties. For example, in December 1999, we entered into an agreement with American Home Products Corporation to develop and commercialize jointly products for use in treating the effects of hepatitis C virus in humans. Under this Agreement, we licensed to them worldwide rights under patents and know-how owned by us or created under the agreement. In November 1999, we entered into a product development and commercialization agreement with Battelle Memorial Institute in connection with our RSV program. We are currently engaged in additional discussions relating to other arrangements. We cannot be sure that we will be able to enter into any such arrangements with third parties on terms acceptable to us or at all. Third party arrangements may require us to grant certain rights to third parties, including exclusive marketing rights to one or more products, or may have other terms that are burdensome to us, and may involve the acquisition of our equity securities. Our ultimate success may depend upon the success of our collaborators. We have obtained, and intend to obtain in the future, licensed rights to certain proprietary technologies and compounds from other entities, individuals and research institutions, for which we may be obligated to pay license fees, make milestone payments and pay royalties. We may be unable to enter into collaborative licensing or other arrangements that we need to develop and commercialize our drug candidates. Moreover, we may not realize the contemplated benefits from such collaborative licensing or other arrangements. These arrangements may place responsibility on our collaborative partners for preclinical testing, human clinical trials, the preparation and submission of applications for regulatory approval, or for marketing, sales and distribution support for product commercialization. We cannot be certain that any of these parties will fulfill their obligations in a manner consistent with our best interests. These arrangements may also require us to transfer certain material rights or 19 issue our equity securities to corporate partners, licensees and others. Any license or sublicense of our commercial rights may reduce our product revenue. Moreover, we may not derive any revenues or profits from these arrangements. In addition, our current strategic arrangements may not continue and we may be unable to enter into future collaborations. Collaborators may also pursue alternative technologies or drug candidates, either on their own or in collaboration with others, that are in direct competition with us. We depend on patents and proprietary rights, which may offer only limited protection against potential infringement. If we are unable to protect our patents and proprietary rights, our business, financial condition and results of operations will be harmed. The pharmaceutical industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Our success depends, in part, on our ability to develop and maintain a strong patent position for our products and technologies both in the United States and in other countries. Litigation or other legal proceedings may be necessary to defend against claims of infringement, to enforce our patents, or to protect our trade secrets, and could result in substantial cost to us and diversion of our efforts. We intend to file applications as appropriate for patents covering the composition of matter of our drug candidates, the proprietary processes for producing such compositions, and the uses of our drug candidates. We own six issued United States patents and have 11 pending United States patent applications. We also have filed international patent applications in order to pursue patent protection in major foreign countries. We also rely on trade secrets, know-how and continuing technological advancements to protect our proprietary technology. We have entered into confidentiality agreements with our employees, consultants, advisors and collaborators. However, these parties may not honor these agreements and we may not be able to successfully protect our rights to unpatented trade secrets and know-how. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how. Many of our scientific and management personnel were previously employed by competing companies. As a result, such companies may allege trade secret violations and similar claims against us. To facilitate development of our proprietary technology base, we may need to obtain licenses to patents or other proprietary rights from other parties. If we are unable to obtain such licenses, our product development efforts may be delayed. We may collaborate with universities and governmental research organizations which, as a result, may acquire certain rights to any inventions or technical information derived from such collaboration. We may incur substantial costs in asserting any patent rights and in defending suits against us related to intellectual property rights. Such disputes could substantially delay our product development or commercialization activities. The United States Patent and Trademark Office or a private party could institute an interference proceeding relating to our patents or patent applications. An opposition or revocation proceeding could be instituted in the patent offices of foreign jurisdictions. An adverse decision in any such proceeding could result in the loss of our rights to a patent or invention. Any of our future products, including pleconaril, may not be accepted by the market, which would harm our business and results of operations. Even if approved by the FDA and other regulatory authorities, our product candidates may not achieve market acceptance and we may not receive revenues from these products as anticipated. The degree of market acceptance will depend upon a number of factors, including: . the receipt and timing of regulatory approvals; 20 . the availability of third-party reimbursement; and . the establishment and demonstration in the medical community of the clinical safety, efficacy and cost-effectiveness of drug candidates, as well as their advantages over existing technologies and therapeutics. We may not be able to successfully manufacture and market our products even if they perform successfully in clinical trials. Furthermore, physicians or the medical community in general may not accept and utilize any of our products. We may not receive third party reimbursement for any of our future products, which may harm our results of operations. Our future revenues, profitability and access to capital will be affected by the continuing efforts of governmental and private third-party payors to contain or reduce the costs of health care through various means. We expect a number of federal, state and foreign proposals to control the cost of drugs through governmental regulation. We are unsure of the form that any health care reform legislation may take or what actions federal, state, foreign, and private payors may take in response to the proposed reforms. Therefore, we cannot predict the effect of any implemented reform on our business. Our ability to commercialize our products successfully will depend, in part, on the extent to which reimbursement for the cost of such products and related treatments will be available from government health administration authorities, such as Medicare and Medicaid in the United States, private health insurers and other organizations. Significant uncertainty exists as to the reimbursement status of newly approved health care products, particularly for indications for which there is no current effective treatment or for which medical care typically is not sought. Adequate third-party coverage may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product research and development. If adequate coverage and reimbursement levels are not provided by government and third-party payors for use of our products, our products may fail to achieve market acceptance and our results of operations will be harmed. We need substantial additional funding and may not have access to capital. If we are unable to raise capital when needed, we may need to delay, reduce or eliminate research and development programs or our commercialization efforts, which would harm our business. We will need to raise substantial additional funds to continue our business activities. We have incurred losses from operations since inception and we expect to incur additional operating losses at an increasing rate over at least the next several years. We expect this increase to result from further research and development activities, further clinical trials, development of marketing and sales capabilities and building the requisite infrastructure, and milestone payments related to pleconaril and our other product candidates. We believe that we will require additional capital in 2003. However, our actual capital requirements will depend upon numerous factors, including: . the development of commercialization activities and arrangements; . the progress of our research and development programs; . the progress of preclinical and clinical testing; . the time and cost involved in obtaining regulatory approvals; . the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; . the effect of competing technological and market developments; . the effect of changes and developments in our existing collaborative, licensing and other relationships; and . the terms of any new collaborative, licensing and other arrangements that we may establish. 21 We may be unable to raise sufficient funds to complete our development, marketing and sales activities for pleconaril or any of our other product candidates. Potential funding sources include: . public and private securities offerings; . debt financing, such as bank loans; and . collaborative, licensing and other arrangements with third parties. We may not be able to find sufficient debt or equity funding on acceptable terms. If we cannot, we may need to delay, reduce or eliminate research and development programs. The sale by us of additional equity securities or the expectation that we will sell additional equity securities may have an adverse effect on the price of our common stock. In addition, collaborative arrangements may require us to grant product development programs or licenses to third parties for products that we might otherwise seek to develop or commercialize ourselves. We face intense competition, which could harm our business and results of operations. There are many entities, both public and private, including well-known, large pharmaceutical companies, chemical companies, biotechnology companies and research institutions, engaged in developing pharmaceuticals for applications similar to those targeted by us. Developments by these or other entities may render our products under development non-competitive or obsolete. Many of these companies have substantially greater resources and experience than we have. Accordingly, our competitors may succeed in obtaining regulatory approval for products more rapidly and more effectively than we do. Competitors may succeed in developing products that are more effective and less costly than any that may be developed by us and also may prove to be more successful in the manufacture and marketing of products. We may not be able to keep pace with technological changes in the biopharmaceutical industry, which may prevent us from commercializing our product candidates. Our business is characterized by extensive research efforts and rapid technological progress. New developments in molecular biology, medicinal chemistry and other fields of biology and chemistry are expected to continue at a rapid pace in both industry and academia. Research and discoveries by others may render some or all of our programs or drug candidates non- competitive or obsolete. Our business strategy is based, in part, upon the application of our technology platform to discover and develop pharmaceutical products for the treatment of infectious human diseases. This strategy is subject to the risks inherent in the development of new products using new and emerging technologies and approaches. There are no approved drugs on the market for the treatment of certain of the disease indications being targeted by us. Unforeseen problems may develop with our technologies or applications. We may not be able to successfully address technological challenges that we encounter in our research and development programs and may not ultimately develop commercially feasible products. We depend on key personnel and may not be able to retain these employees or recruit additional qualified personnel, which would harm our business. Because of the specialized scientific nature of our business, we are highly dependent upon qualified scientific, technical and managerial personnel. Our anticipated growth and expansion into new areas and activities will require additional expertise and the addition of new qualified personnel. For example, we intend to recruit sales and marketing personnel to support the commercialization of pleconaril. We will face intense competition in recruiting these persons. We may not be able to attract and retain qualified personnel to develop our sales and marketing forces. There is intense competition for qualified personnel in the pharmaceutical field. Therefore, we may not be able to attract and retain the qualified personnel necessary for the development of our business. Furthermore, we have not entered into non- competition agreements with our key employees. The loss of the services of existing personnel, as well as the failure to recruit additional key scientific, technical and 22 managerial personnel in a timely manner would harm our research and development programs and our business. We do not maintain key man life insurance on any of our employees. We may be subject to product liability claims, which may harm our business, financial condition and results of operations regardless of the outcome. The administration of drugs to humans, whether in clinical trials or after marketing clearance is obtained, can result in product liability claims. Product liability claims can be expensive, difficult to defend and may result in large judgments or settlements against us. In addition, third party collaborators and licensees may not protect us from product liability claims. Although we maintain product liability insurance, claims could exceed the coverage obtained. A successful product liability claim in excess of our insurance coverage could harm our business, financial condition and results of operations. In addition, any successful claim may prevent us from obtaining adequate product liability insurance in the future on commercially desirable terms. Even if a claim is not successful, defending such a claim may be time- consuming and expensive. The rights that have been and may in the future be granted to holders of our common or preferred stock may adversely affect the rights of other stockholders and may discourage a takeover. Pursuant to our certificate of incorporation, our board of directors has the authority, without further action by the holders of our common stock, to issue 5,000,000 shares of preferred stock from time to time in such series and with such preferences and rights as it may designate. As of February 15, 2000, we have issued 2,300,000 shares of series A convertible participating preferred stock and have reserved for issuance 200,000 shares of series A junior participating preferred stock. Thus, we may issue an additional 2,500,000 shares of preferred stock. The preferences and rights of any such additional preferred stock may be superior to those of the holders of our common stock. For example, the holders of preferred stock may be given a preference in payment upon our liquidation, or for the payment or accumulation of dividends before any distributions are made to the holders of our common stock. On May 5, 1999, we completed the sale of 2,300,000 shares of series A convertible participating preferred stock to PSV, LP (formerly Perseus-Soros BioPharmaceutical Fund, L.P.). This preferred stock is convertible into shares of common stock on a one-for-one basis (subject to adjustment) by PSV at any time and by us under certain conditions. There is a 5% annual dividend, payable quarterly, associated with this preferred stock. We may choose to permanently defer payment of any dividend, in which case the dividend is added to the liquidation value and increases the conversion ratio of the preferred stock into common stock. Holders of the preferred stock have liquidation rights equal to their original investment, subject to adjustment. Such holders also have preemptive rights with respect to proposed private placements of our common stock or other equity securities for cash, other than issuances under our equity compensation or stock option plans and issuances pursuant to our stockholder rights plan, at a price below $6.20 per share (with adjustment for any stock dividend, stock split or other subdivision of stock, or any combination or reclassification of stock). In September 1998, our board of directors adopted a plan that grants each holder of our common stock the right to purchase shares of our series A junior participating preferred stock. This plan is designed to help insure that all our stockholders receive fair value for their shares of common stock in the event of a proposed takeover of ViroPharma, and to guard against the use of partial tender offers or other coercive tactics to gain control of ViroPharma without offering fair value to the holders of our common stock. The plan is likely to discourage a merger or tender offer involving our securities that is not approved by our board of directors by increasing the cost of effecting any such transaction and, accordingly, could have an adverse impact on holders of our stock who might want to vote in favor of such a merger or participate in such a tender offer. While we have no present intention to authorize or issue any additional series of preferred stock, any such authorization or issuance, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could also have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. The preferred stock may have other rights, including economic rights senior to 23 those of our common stock, and, as a result, an issuance of additional preferred stock could adversely affect the market value of our common stock. We have significant indebtedness and we may not be able to meet our obligations We are highly leveraged and have significant debt service requirements. In March 2000, we issued $180,000,000 of convertible subordinated notes due in March 2007. Our interest expense will increase significantly during the term that the convertible notes are outstanding. This increased indebtedness will impact us by: . significantly increasing our interest expense and related debt service costs; and . making it more difficult to obtain additional financing. Currently, we are not generating sufficient cash flow from operations to satisfy the annual debt service payments that will be required as a result of the consummation of this offering. This may require us to use a portion of the proceeds of this offering to pay interest or borrow additional funds or sell additional equity to meet our debt service obligations. If we are unable to satisfy our debt service requirements, substantial liquidity problems could result, which would negatively impact our future prospects. Our ability to meet our debt service obligations and to reduce our total indebtedness depends on our future operating performance and on economic, financial, competitive, regulatory and other factors affecting our operations. Many of these factors are beyond our control and our future operating performance could be adversely affected by some or all of these factors. We historically have been unable to generate sufficient cash flow from operations to meet our operating needs and have relied on equity, debt and capital lease financings to fund our operations. Year 2000 issues could disrupt our business. Our assessment of our exposure to Year 2000-related problems focused on four potential areas of exposure: internal information systems; scientific equipment; facility support systems; and the readiness of significant third parties with whom we have material business relationships. During 1999, we implemented all necessary upgrades to our internal information systems and to date have not experienced significant operational problems. In addition, to date our major pieces of scientific equipment and our major facility support systems such as communications, security and building maintenance systems, have shown to be Year 2000-compliant. We contacted our significant suppliers and service providers to determine if such parties were Year 2000 compliant. To date, we have not been advised of material Year 2000 issues by any of these parties. In addition, all contracts between us and third parties providing product development or manufacturing services to us require such third parties be in compliance with the laws, regulations and guidelines of the Federal Food, Drug, and Cosmetic Act, which requires appropriate steps to eliminate Year 2000 computer risks. We cannot be certain that the systems of these third parties will be timely converted and any failure by these companies to do so may have an adverse impact on our business. We estimate that future cost, if any, of addressing Year 2000 issues will not have a significant impact on our results of operations. We are subject to environmental risks which may adversely affect our business. Our research and development processes involve the controlled use of hazardous, infectious and radioactive materials. We are subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials and wastes. We may be required to incur significant costs to comply with environmental laws, rules, regulations and policies. In addition, our business may be adversely affected by current or future environmental laws, rules, regulations and policies or by any releases or discharges of materials that could be hazardous. We utilize radioactive and other materials that could be hazardous to human health, safety or the environment. We store these materials and various wastes resulting from their use at our facility pending ultimate 24 use and disposal. Although we believe that our safety procedures for handling and disposing of such materials comply with federal, state and local laws, rules, regulations and policies, the risk of accidental injury or contamination from these materials cannot be entirely eliminated. If such an accident occurs, we could be held liable for any resulting damages, and any such liability could exceed our resources. We do not maintain a separate insurance policy for these types of risks. ITEM 2. PROPERTIES Our corporate facilities located in Exton, Pennsylvania currently occupy approximately 48,400 square feet. We are expanding by 22,500 square feet and may expand to a total of 86,500 square feet. The lease, which will expire in 2008, has two 5-year renewal options, monthly base rent and additional provisions for allocation of direct expense charges for utilities, maintenance, insurance and property taxes. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Executive Officers of the Registrant The following is a list of our executive officers, including their ages, as of December 31, 1999:
Name Age Position ---- --- -------- Claude H. Nash................. 57 Chief Executive Officer, President and Chairman of the Board of Directors Marc S. Collett, Ph.D.......... 48 Vice President, Discovery Research Thomas F. Doyle................ 39 Vice President, General Counsel and Secretary Johanna A. Griffin, Ph.D....... 55 Vice President, Business Development Michael Kelly.................. 35 Executive Director, Marketing Mark A. McKinlay, Ph.D......... 48 Vice President, Research & Development Vincent J. Milano.............. 36 Vice President, Chief Financial Officer and Treasurer
Claude H. Nash, a co-founder of ViroPharma, has served as Chairman of the Board of Directors of ViroPharma since February 1997, and as Chief Executive Officer, President and director since our commencement of operations in December 1994. From 1983 until 1994, Dr. Nash served as Vice President, Infectious Disease and Tumor Biology at Schering-Plough Corporation, a pharmaceutical company. Dr. Nash received his Ph.D. from Colorado State University. Marc S. Collett, Ph.D., a co-founder of ViroPharma, has served as Vice President, Discovery Research of ViroPharma since our commencement of operations in December 1994. From 1993 until 1994, he served as Senior Director, Viral Therapeutics at PathoGenesis Corporation, a biotechnology company. Prior to joining PathoGenesis Corporation, Dr. Collett served as Director, Virology & Antibody Engineering and Director, Biochemical Virology at MedImmune, Inc., a biotechnology company, where he was employed from 1988 to 1993. Dr. Collett received his Ph.D. from the University of Michigan. Thomas F. Doyle has served as Vice President, General Counsel of ViroPharma since November 1997, as Secretary since February 1997 and as Executive Director, Counsel since joining ViroPharma in November 1996. From 1990 until 1996, Mr. Doyle was a corporate attorney with the law firm of Pepper, Hamilton LLP. Mr. Doyle received his J.D. from Temple University School of Law. Prior to attending Temple University, Mr. Doyle was a certified public accountant. Mr. Doyle received his B.S. in accounting from Mt. St. Mary's College. 25 Johanna A. Griffin, Ph.D., a co-founder of ViroPharma, has served as Vice President, Business Development since June 1995 and, from December 1994 until June 1995, Dr. Griffin served as Executive Director, Business Development. From 1990 until 1994, Dr. Griffin served as Director of Molecular Biology at Boehringer Ingelheim Pharmaceuticals, Inc., a pharmaceutical company. Dr. Griffin received her Ph.D. from the University of Alabama at Birmingham. Michael Kelly has served as Executive Director, Marketing since joining ViroPharma in April 1997. From 1991 until 1997, Mr. Kelly held various positions at TAP Pharmaceuticals, a pharmaceutical company, the latest being Manager of Hospital Account Executives within the Mid-Atlantic Region. Mr. Kelly received his B.S. in Marketing from the Trenton State College and his M.B.A. from Rider College. Mark A. McKinlay, Ph.D., a co-founder of ViroPharma, has served as Vice President, Research & Development since our commencement of operations in December 1994, and served as Secretary from December 1994 until February 1997. From 1989 through 1994, Dr. McKinlay served in several positions, including Senior Director, at Sterling Winthrop Pharmaceuticals Research Division, a division of Sterling Winthrop Incorporated, a pharmaceutical company. Dr. McKinlay received his Ph.D. from Renssalear Polytechnic Institute. Vincent J. Milano has served as Vice President, Chief Financial Officer of ViroPharma since November 1997, as Vice President, Finance & Administration since February 1997, as Treasurer since July 1996, and as Executive Director, Finance & Administration from April 1996 until February 1997. From 1985 until 1996, Mr. Milano was with KPMG LLP, independent certified public accountants, where he was Senior Manager since 1991. Mr. Milano is a certified public accountant. Mr. Milano received his B.S. in accounting from Rider College. 26 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information The Company's Common Stock is traded on the National Market segment of The Nasdaq Stock Market under the symbol "VPHM." We commenced trading on The Nasdaq Stock Market on November 19, 1996. The following table sets forth the high and low sale prices as quoted on The Nasdaq Stock Market for each quarter of 1998 and 1999 and through March 13, 2000.
High Low ------- ------ Year ended December 31, 1998 First Quarter.............................................. $ 21.75 $ 16.5 Second Quarter............................................. $ 26.13 $19.63 Third Quarter.............................................. $ 24.25 $14.00 Fourth Quarter............................................. $ 20.00 $ 7.88 Year ended December 31, 1999 First Quarter.............................................. $ 13.00 $ 5.00 Second Quarter............................................. $ 9.31 $ 6.13 Third Quarter.............................................. $ 29.44 $ 7.68 Fourth Quarter............................................. $ 47.00 $18.50 First Quarter 2000 (through March 13)...................... $111.66 $28.88
Holders and Dividends There were approximately 421 record holders of the Company's Common Stock as of March 1, 2000. We have never declared or paid any cash dividends on our common stock. There is a 5% annual dividend, payable quarterly, associated with our series A convertible participating preferred stock. We may choose to permanently defer any quarterly payment, in which case the amount of payment is added to the liquidation value and increases the conversion ratio of the preferred stock into common stock. Alternatively, we may choose to pay the dividend in cash. In January 2000, we paid a cash dividend for the quarter ended December 31, 1999 of $181,700 on our series A convertible participating preferred stock. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent on then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business and other factors our board of directors deems relevant. In addition, our business loan agreements restrict our ability to declare and pay cash dividends. We are obligated to pay any cash dividends paid to common stockholders to the holders of our series A convertible participating preferred stock on an as converted basis. Recent Sales of Unregistered Securities None. ITEM 6. SELECTED FINANCIAL DATA The selected financial data presented below under the caption "Balance Sheet Data" as of December 31, 1995, 1996, 1997, 1998 and 1999, and under the caption "Statement of Operations Data" for the years ended December 31, 1995, 1996, 1997, 1998 and 1999 are derived from financial statements of the Company which have been audited by KPMG LLP, independent certified public accountants. The data set forth below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, the Financial Statements and the Notes thereto and the other financial information included 27 elsewhere in this Report. We are considered a "development stage company" as described in Note 1 of the Company's Financial Statements.
Year Ended Year Ended Year Ended Year Ended Year Ended December 31, December December 31, December 31, December 31, 1995 31, 1996 1997 1998 1999 ------------ ----------- ------------ ------------ ------------ Statement of Operations Data: License fee and milestones revenue..... $ -- $ 1,000,000 $ 1,500,000 $ 1,500,000 $ -- Grant revenue........... 90,813 436,081 -- -- -- ----------- ----------- ------------ ------------ ------------ Total revenues.......... 90,813 1,436,081 1,500,000 1,500,000 -- ----------- ----------- ------------ ------------ ------------ Operating expenses: Research and development............ 2,930,106 6,694,703 10,928,976 25,130,232 26,055,884 General and administrative......... 1,091,299 1,421,524 3,341,081 4,375,800 4,986,452 ----------- ----------- ------------ ------------ ------------ Total operating expenses............... 4,021,405 8,116,227 14,270,057 29,506,032 31,042,336 Interest income, net.... 75,730 285,142 1,320,174 1,603,916 1,542,298 ----------- ----------- ------------ ------------ ------------ Net loss................ $(3,854,862) $(6,395,004) $(11,449,883) $(26,402,116) $(29,500,038) =========== =========== ============ ============ ============ Net loss allocable to common stockholders.... $(3,873,966) $(7,992,345) $(11,449,883) $(26,402,116) $(34,574,571) =========== =========== ============ ============ ============ Net loss per share allocable to common stockholders: Basic................. $ (4.67) $ (3.89) $ (1.13) $ (2.30) $ (2.84) Diluted............... (3.52) (3.44) (1.13) (2.30) $ (2.84) Shares used in computing net loss per share allocable to common stockholders: Basic................. 828,750 2,053,114 10,092,590 11,485,589 12,181,853 Diluted............... 1,099,396 2,323,760 10,092,590 11,485,589 12,181,853 December 31, ------------------------------------------------------------------- 1995 1996 1997 1998 1999 ------------ ----------- ------------ ------------ ------------ Balance Sheet Data: Cash, cash equivalents and short-term investments $ 4,713,426 $22,547,679 $ 43,368,462 $ 20,011,782 $ 66,852,920 Working capital......... 3,270,375 20,001,703 37,209,028 11,490,395 58,691,259 Total assets............ 4,873,845 23,452,879 46,275,480 23,657,401 72,085,866 Loan payable- noncurrent............. -- -- 416,667 1,822,917 525,000 Long-term capital leases................. -- 104,571 53,186 2,807 -- Mandatorily redeemable convertible preferred stock.................. 7,416,604 -- -- -- -- Total stockholders' equity (deficit)....... (4,089,758) 20,605,161 39,150,871 12,836,031 58,291,236
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our disclosure and analysis in this report contains some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and other words and terms of similar 28 meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to present or anticipated scientific progress, development of potential pharmaceutical products, future revenues, capital expenditures, research and development expenditures, future financings and collaborations, personnel, manufacturing requirements and capabilities, and other statements regarding matters that are not historical facts or statements of current condition. Any or all of our forward-looking statements in this report may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. We do not intend to update our forward-looking statements to reflect future events or developments. Overview Since inception, we have devoted substantially all of our resources to our research and product development programs. We have generated no revenues from product sales and have been dependent upon funding primarily from equity financing. We do not expect any revenues from product sales for at least the next twelve months, if at all. We have not been profitable since inception and we have incurred a cumulative net loss of $77,921,000 through December 31, 1999. Losses have resulted principally from costs incurred in research and development activities and general and administrative expenses. We expect to incur additional operating losses over at least the next several years. We expect such losses to increase over historical levels, primarily due to expected increases in our research and development expenses, further clinical trials of our most advanced product candidate, pleconaril (including any significant additional studies for approval in the European Union, if any are required), and milestone payments that may be payable under the terms of our agreement with Sanofi-Synthelabo for pleconaril. Also, we expect to incur expenses related to our marketing and market research activities for pleconaril, our development of a marketing and sales staff and building the requisite infrastructure, and further research and development related to other product candidates. Our ability to achieve profitability is dependent on a number of factors, including our ability to develop and obtain regulatory approvals for our product candidates, successfully commercialize those product candidates (which may include entering into collaborative agreements for product development and commercialization), and secure contract manufacturing and distribution and logistics services. Liquidity and Capital Resources We began operations in December 1994. We are a development stage pharmaceutical company and to date have not generated revenues from product sales. The cash flows used in operations are primarily for research and development activities and supporting general and administrative expenses. Through December 31, 1999, we have used approximately $64.7 million in operating activities. We invest our cash in short-term investments. Through December 31, 1999, we have used approximately $65.3 million in investing activities, including $60.5 million in short-term investments and $4.8 million in equipment purchases and leasehold improvements. Through December 31, 1999, we have financed our operations primarily through public offerings of common stock, private placements of preferred stock, two bank loans, equipment lease lines and a milestone advance totaling approximately $137.0 million net of repayments. At December 31, 1999, we had cash and cash equivalents and short-term investments aggregating approximately $66.9 million. In March 2000, we closed on a $180,000,000 private placement of convertible subordinated notes due 2007. The notes are convertible into shares of our common stock at a price of $109.15 per share, subject to certain adjustments. The notes bear interest at a rate of 6 percent per annum payable semiannually in arrears, have a 7 year term and can be redeemed by us, at certain premiums over the principal amount, at any time on or after March 6, 2003. The notes may be required to be repaid on the occurrence of certain fundamental changes as defined. We lease our corporate and research and development facilities under an operating lease expiring in 2008. We also have the right to expand the facility and, under certain circumstances, to purchase the facility. We have financed substantially all of our equipment under two bank loans and two master lease agreements. The 29 first bank loan, which we entered into in February 1997, is for $600,000, is payable in equal monthly installments over 72 months and has a 9.06% interest rate. The second bank loan, which we entered into in December 1998, is for $500,000, is payable in equal monthly installments over 60 months and has a 7.25% interest rate. We have paid off one of the lease agreements and expect to pay off the second lease agreement in 2000. As of March 1, 2000, aggregate outstanding borrowings under these bank loans and lease agreements were approximately $700,000. Under our agreement with Sanofi-Synthelabo, we are required to make milestone payments upon the achievement of certain development milestones and, until the expiration of the last patent on pleconaril or any related drug, royalty payments on any sales in the United States and Canada of products developed under the agreement. The development milestones include regulatory submissions of New Drug Applications and regulatory approvals in various jurisdictions, however we may not be able to achieve these milestones. Unless the agreement is earlier terminated, in September 2001, or within 60 days after we file a New Drug Application for pleconaril for the treatment of viral meningitis, whichever occurs sooner, we will be required to pay Sanofi-Synthelabo $900,000. We entered into an addendum to our development agreement with SELOC France in 1998. Under this addendum, SELOC France has manufactured three validation batches of pleconaril drug substance. SELOC France also is assisting us in preparing the pleconaril drug master file and is preparing certain documentation that will be required with our New Drug Applications for pleconaril. We will pay approximately $750,000 during the first half of 2000 under this addendum. We expect to engage SELOC to manufacture additional quantities of pleconaril during the second half of 2000 to build inventory for the potential launch of pleconaril. We estimate that such additional inventory will cost approximately $2.25 million. On October 9, 1997, we received $1.0 million from Boehringer Ingelheim Pharmaceuticals, Inc. as an advance on a future milestone in connection with a collaborative research agreement. The Boehringer Agreement expired in August 1998. The advance was made in the form of a loan that bears interest at 8.5% and is evidenced by a convertible promissory note. If amounts due under the note are not paid by August 15, 2000, Boehringer Ingelheim may convert the then-outstanding principal balance and accrued interest into shares of our common stock based on the last sale price of the common stock on the date immediately prior to the date Boehringer Ingelheim notifies us of its intention to convert the promissory note. We recently completed our expansion of our research and development capabilities at our facility. We invested approximately $1,000,000 for this expansion. In addition, we have exercised our right to expand our current facility by 22,500 square feet. We will incur no additional material capital expenditures in connection with this expansion. We expect that rent expense in future years will increase approximately $268,000 per year, commencing in mid- 2000. We have incurred losses from operations since inception. We expect to incur additional operating losses over at least the next several years. We expect to incur such losses at an increasing rate over at least the next several years, primarily due to expected increases in our research and development expenses, further clinical trials and clinical development of our most advanced product candidate, pleconaril (including any significant additional studies for approval in the European Union, if any are required), and milestone payments that may be payable under the terms of our agreement with Sanofi-Synthelabo for pleconaril. Also, we expect to incur expenses for pleconaril marketing and market research activities, our development of a marketing and sales staff and building the requisite infrastructure, and further research and development related to other product candidates. We expect that we will need to raise additional funds to continue our business activities and to further expand our facilities. We may need additional financing to complete all clinical studies, to develop our marketing and sales staffs for pleconaril and to build the requisite infrastructure. We expect that we will need additional financing for the development and required testing of our hepatitis C and RSV disease compounds, and for any other product candidates. To obtain this financing, we intend to access the public or private equity 30 or debt markets or enter into additional arrangements with corporate collaborators to whom we may issue shares of our stock. For example, in connection with our collaboration and license agreement, American Home Products Corporation will purchase our common stock at a market value premium at the time of completion of certain product development stages. If we raise additional capital by issuing equity securities, the terms and prices for these financings may be much more favorable to the new investors than the terms obtained by our existing stockholders. These financings also may dilute the ownership of existing stockholders. Collaborative arrangements may require us to grant product development programs or licenses to third parties for products that we might otherwise seek to develop or commercialize ourselves. Additional financing, however, may not be available on acceptable terms from any source. If sufficient additional financing is not available, we may need to delay, reduce or eliminate current research and development programs or other aspects of our business. Results of Operations Years ended December 31, 1999 and 1998 We earned no revenues for the year ended December 31, 1999. We earned milestone revenue of $1,500,000 for the year ended December 31, 1998. Our research and development expenses for the year ended December 31, 1999 were $26,055,884 compared to $25,130,232 for the same period in 1998. Research and development expenses for both periods reflected costs associated with the conduct of clinical trials of pleconaril, the company's most advanced drug candidate. In 1999, pleconaril was being studied in three phase 3 clinical trials, two in viral meningitis and one in viral respiratory infection. This compares to 1998 in which the company was conducting phase 2 clinical trials with pleconaril for both viral meningitis and viral respiratory infection, with fewer patients enrolled in these studies compared to the phase 3 clinical studies. The increase in 1999 was also the result of the advancement of drug candidates for the treatment of hepatitis C (HCV) and respiratory syncytial virus (RSV) diseases. We recorded $1,200,000 as a reduction to research and development expenses in the year ended December 31, 1998 for an adjustment to a milestone payable to Sanofi-Synthelabo and the reimbursement that we received from Sanofi-Synthelabo for a license fee that we had previously paid to them. Such amounts were originally recorded as research and development expenses in prior periods. General and administrative expenses were $4,986,452 in the year ended December 31, 1999 compared to $4,375,800 for the same period of 1998. The increase in 1999 is the result of market research and medical education programs for pleconaril and additional employee-related expenses. Net interest income decreased to $1,542,298 for the year ended December 31, 1999 from $1,603,916 for the year ended December 31, 1998, principally due to decreased average invested balances. The net loss increased to $29,500,038 for the year ended December 31, 1999 from $26,402,116 for the year ended December 31, 1998. Years ended December 31, 1998 and 1997 We earned and received two milestone payments for $1,500,000 from Boehringer Ingelheim for each of the years ended December 31, 1998 and 1997. Research and development expenses increased to $25,130,232 for the year ended December 31, 1998 from $10,928,976 for the year ended December 31, 1997. The increase was principally due to the cost of ongoing multiple clinical trials, including the manufacture of bulk drug substance for stability and validation batches, related to pleconaril conducted during the year ended December 31, 1998. Also, we had more scientists conducting discovery research in the year ended December 31, 1998 compared to the year ended December 31, 1997 to advance product candidates for our HCV and RSV disease programs. In addition, we incurred increased expenses for preclinical activities for our HCV and RSV disease research programs in the year ended December 31, 1998 versus the year ended December 31, 1997. We recorded $1,200,000 as a reduction to research and 31 development expenses in the year ended December 31, 1998 for an adjustment to a milestone payable to Sanofi-Synthelabo and the reimbursement that we received from Sanofi-Synthelabo for a license fee that we had previously paid to them. Such amounts were originally recorded as research and development expenses in prior periods. General and administrative expenses increased to $4,375,800 for the year ended December 31, 1998 from $3,341,081 for the year ended December 31, 1997. The increase is principally due to increased pleconaril marketing and market research expenses, salary expenses and facilities costs related to our move to our current facilities in March 1998. Net interest income increased to $1,603,916 for the year ended December 31, 1998 from $1,320,174 for the year ended December 31, 1997, principally due to larger invested balances provided by the proceeds of a follow-on public offering in July 1997. The net loss increased to $26,402,116 for the year ended December 31, 1998 from $11,449,883 for the year ended December 31, 1997. Year 2000 Impact We recognize the need to ensure that our operations will not be harmed by year 2000 software failures. We have assessed the potential overall impact of the impending century change on our business, financial condition and operating results. Our assessment of our exposure to Year 2000-related problems focused on four potential areas of exposure: internal information systems; scientific equipment; facility support systems; and the readiness of significant third parties with whom we have material business relationships. During 1999, we implemented all necessary upgrades to our internal information systems and to date have not experienced any significant operational problems. In addition, to date, our major pieces of scientific equipment and our major facility support systems such as communications, security and building maintenance systems, have shown to be Year 2000 compliant. We contacted significant suppliers and service providers to determine if such parties were Year 2000 compliant. To date, we have not been advised of material Year 2000 issues by any of these parties. The failure of third party suppliers and service providers, particularly contract research organizations engaged by us to monitor clinical trials, to be Year 2000 compliant could adversely affect our operations. If such third parties are not Year 2000 compliant, or are unable to fix problems that they encounter related to the Year 2000 issue in a timely manner, our business or operation could be disrupted. If systems used by our contract research organizations are not Year 2000 compliant, and the data collected by the contract research organizations on our behalf is corrupted or not available, we will have to recreate such data from the source documents, either by ourselves or by engaging others to perform the task on our behalf. If we are required to recreate such data, significant delays in reporting the results of our clinical trials could result. Although, to date, we have not experienced internal systems problems nor have we been notified by any of our third party suppliers and service providers that any of their systems or products have been materially adversely affected due to the Year 2000 issue, we cannot be certain that Year 2000 problems will not arise during the calendar year. To date, we have not expended material amounts on the Year 2000 issue and do not expect future costs, if any, of addressing Year 2000 issues presented by our internal systems to have a material adverse impact on our financial position or results of operations. Recently Issued Accounting Standards In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulleting ("SAB") No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements, including the recognition of non-refundable fees received upon entering into arrangements. We are 32 in the process of evaluating this SAB and the effect it will have on our financial statements and current revenue recognition policy. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our holdings of financial instruments are comprised of a mix of U.S. corporate debt, government securities and commercial paper. All such instruments are classified as securities available for sale. Our debt security portfolio represents funds held temporarily pending use in our business and operations. We manage these funds accordingly. We seek reasonable assuredness of the safety of principal and market liquidity by investing in rated fixed income securities while at the same time seeking to achieve a favorable rate of return. Our market risk exposure consists principally of exposure to changes in interest rates. Our holdings are also exposed to the risks of changes in the credit quality of issuers. We typically invest in the shorter- end of the maturity spectrum. The principal amount and weighted average interest rate of our investment portfolio at December 31, 1999 was $59,868,213 and approximately 5.7%, respectively. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of the Company required by this item are attached to this Report beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the Company's directors and regarding compliance with Section 16 of the Securities Exchange Act of 1934 required by this Item will be set forth in the Company's Proxy Statement, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated by reference to the Company's Proxy Statement. The information concerning the Company's executive officers required by this Item is incorporated by reference herein to the section of this Report in Part I, Item 4 entitled "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION The information required by this Item will be set forth in the Company's Proxy Statement, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated by reference to the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item will be set forth in the Company's Proxy Statement, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated by reference to the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item will be set forth in the Company's Proxy Statement, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated by reference to the Company's Proxy Statement. 33 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of documents filed as part of this report: (1) Financial Statements. The Financial Statements listed in the accompanying Index to Financial Statements appearing on page F-1 are filed as part of this Annual Report on Form 10-K. (2) Financial Statement Schedules. All schedules are omitted because they are not applicable, or not required, or because the required information is included in the Financial Statements or notes thereto. (3) Exhibits. The following is a list of Exhibits filed as part of this Annual Report on Form 10-K. Where so indicated by footnote, Exhibits which were previously filed are incorporated by reference. For Exhibits incorporated by reference, the location of the Exhibit in the previous filing is indicated in parentheses.
Exhibit No. Description ----------- ----------- 3.1 Amended and Restated Certificate of Incorporation of the Company, as amended by a Certificate of Amendment of Amended and Restated Certificate of Incorporation dated May 18, 1999. (12) (Exhibit 3.1) 3.2 Certificate of Designation establishing and designating the Series A Junior Participating Preferred Shares. (9) (Exhibit 3.2) 3.3 Amended and Restated By-Laws of the Company. (12) (Exhibit 3.3) 3.4 Certificate of Designation establishing and designating the Series A Convertible Participating Preferred Stock.(10) (Exhibit 3.4) 4.1 Rights Agreement, dated as of September 10, 1998, between ViroPharma Incorporated and StockTrans, Inc., as Rights Agent. (4) (Exhibit 4.1) 4.2 Amendment No. 1 to Rights Agreement.(10) (Exhibit 4.2) 10.1++ ViroPharma Incorporated Stock Option Plan (5) 10.2+ Agreement dated December 22, 1995 between the Company and Sanofi. (1) (Exhibit 10.6) 10.3 Form of Employment Agreement. (1) (Exhibit 10.8) 10.4 Form of Indemnification Agreement. (1) (Exhibit 10.9) 10.5 Restricted Stock Purchase Agreement dated as of January 17, 1996, by and between the Company and Frank Baldino, Jr. (1) (Exhibit 10.11) 10.6 Series B Convertible Preferred Stock Purchase Agreement dated as of June 16, 1995 among the Company and each of the entities on the "Schedule of Purchasers" attached thereto as Schedule A. (1) (Exhibit 10.12) 10.7 Series C Convertible Preferred Stock Purchase Agreement dated as of May 30, 1996 among the Company and each of the individuals and entities on the "Schedule of Purchasers" attached thereto as Schedule A. (1) (Exhibit 10.13) 10.8 Amended and Restated Investors' Rights Agreement, dated as of May 30, 1996, by and among the Company and the persons identified on Schedule A, Schedule B and the Schedule of Founders thereto. (1) (Exhibit 10.16) 10.9 Amendment to Restricted Stock Purchase Agreement dated as of January 17, 1996, among the Company and Frank Baldino, Jr., dated as of January 17, 1996. (1) (Exhibit 10.18) 10.10 Development Agreement dated as of April 16, 1997, by and among SELOC AG, SICOR, S.A. and the Company. (2) (Exhibit 10.19) 10.11 First Amendment to Agreement dated as of February 21, 1997 by and between Sanofi and the Company. (2) (Exhibit 10.20) 10.12 Promissory Note of Jon M. Rogers and Traci J. Rogers, dated as of June 12, 1997. (2) (Exhibit 10.21) 10.13 Lease, dated July 21, 1997, between the Company and The Hankin Group. (2) (Exhibit 10.23) 10.14 Purchase Option Agreement, dated July 21, 1997, between the Company and The Hankin Group. (2) (Exhibit 10.24)
34
Exhibit No. Description ----------- ----------- 10.15 Escrow Agreement, dated July 21, 1997, among the Company. The Hankin Group and Manito Abstract Company, Inc.(2)(Exhibit 10.25) 10.16 Consulting Agreement dated July 31, 1997 between the Company and Frank Baldino, Jr. (2) (Exhibit 10.27) 10.17 Promissory Note of Vincent J. Milano and Christie A. Milano, dated August 20, 1997. (3) (Exhibit 10.29) 10.18 Consulting Agreement dated November 13, 1997 between the Company and David J. Williams. (6) (Exhibit 10.26) 10.19 Promissory Note of Michael Kelly and Joan C. Kelly, dated February 18, 1998. (7) (Exhibit 10.27) 10.20 Addendum to Development Agreement dated as of March 1, 1998 between the Company and SELOC France. (8) (Exhibit 10.28) 10.21 Investment Agreement among ViroPharma Incorporated and Perseus- Soros Biopharmaceutical Fund, L.P. dated May 5, 1999. (10) (Exhibit 10.21) 10.22 ViroPharma Incorporated Common Stock Purchase Warrant (10) (Exhibit 10.22) 10.23 Letter Agreement dated June 7, 1999 between the Company and Perseus-Soros BioPharmaceutical Fund, L.P. (11) (Exhibit 10.23) 10.24*+ Product Development and Commercialization Agreement dated November 19, 1999 between Battelle Memorial Institute and ViroPharma Incorporated. (Exhibit 10.24) 10.25*+ Collaboration and License Agreement dated December 9, 1999 between American Home Products Corporation, acting through its Wyeth- Ayerst Laboratories Division, and ViroPharma Incorporated. (Exhibit 10.25) 10.26*+ Stock Purchase Agreement dated December 9, 1999 between American Home Products Corporation and ViroPharma Incorporated. (Exhibit 10.26) 11* Statement of Computation of Loss Per Share. 23* Consent of KPMG LLP. 24* Power of Attorney (included on signature page). 27* Financial Data Schedule.
- -------- * Filed herewith. + Portions of this exhibit were omitted and filed separately with the Securities and Exchange Commission pursuant to an application for confidential treatment. ++ Compensation plans and arrangements for executives and others. (1) Filed as an Exhibit to Registration Statement on Form S-1 (File No. 333- 12407), as amended, initially filed on September 20, 1996. (2) Filed as an Exhibit to Registration Statement on Form S-1 (File No. 333- 30005), as amended, initially filed on June 25, 1997. (3) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended September 30, 1997. (4) Filed as an Exhibit to the Company's Current Report on Form 8-K filed with the Commission on September 21, 1998. (5) Filed as an Annex to the Company's Proxy Statement filed with the Commission on April 15, 1998. (6) Filed as an Exhibit to Registrant's Form 10-K for the year ended December 31, 1997. (7) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended March 31, 1998. (8) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended June 30, 1998. (9) Filed as an Exhibit to Registrant's Form 10-K for the year ended December 31, 1998. (10) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended March 31, 1999. (11) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended June 30, 1999. Copies of the exhibits are available to stockholders from Thomas F. Doyle, Vice President, General Counsel and Secretary, ViroPharma Incorporated, 405 Eagleview Boulevard, Exton, Pennsylvania 19341. There will be a fee to cover the Company's expenses in furnishing the exhibits. (b) Reports on Form 8-K There were no reports on Form 8-K filed by the Company for the quarter ended December 31, 1999. 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized. VIROPHARMA INCORPORATED /s/ Vincent J. Milano By: _________________________________ Vincent J. Milano Vice President, Chief Financial Officer and Treasurer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Claude H. Nash and Vincent J. Milano as his or her attorney-in-fact, with the full power of substitution, for him or her in any and all capacities, to sign any amendments to this Report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Name Capacity Date ---- -------- ---- /s/ Claude H. Nash President, Chief Executive March 15, 1999 ______________________________________ Officer and Chairman of Claude H. Nash the Board (Principal Executive Officer) /s/ Vincent J. Milano Vice President, Chief March 15, 1999 ______________________________________ Financial Officer and Vincent J. Milano Treasurer (Principal Financial and Accounting Officer) /s/ Claude H. Nash Director March 15, 1999 ______________________________________ Claude H. Nash /s/ Frank Baldino, Jr., Ph.D Director March 15, 1999 ______________________________________ Frank Baldino, Jr., Ph.D. /s/ Robert J. Glaser Director March 15, 1999 ______________________________________ Robert J. Glaser /s/ Ann H. Lamont Director March 15, 1999 ______________________________________ Ann H. Lamont /s/ Howard Pien Director March 15, 1999 ______________________________________ Howard Pien /s/ David J. Williams Director March 15, 1999 ______________________________________ David J. Williams
36 ViroPharma Incorporated (A Development Stage Company) Index to Financial Statements
Page -------- Independent Auditors' Report.......................................... F-1 Balance Sheets at December 31, 1998 and 1999.......................... F-2 Statements of Operations and Comprehensive Loss for the years ended December 31, 1997, 1998 and 1999, and the period December 5, 1994 (Inception) to December 31, 1999..................................... F-3, F-4 Statements of Stockholders' Equity for the period December 5, 1994 (Inception) to December 31, 1996, and the years ended December 31, 1997, 1998, and 1999 ................................................ F-5 Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999, and the period December 5, 1994 (Inception) to December 31, 1999 ................................................................ F-6 Notes to Financial Statements......................................... F-7
Independent Auditors' Report The Stockholders and Board of Directors ViroPharma Incorporated: We have audited the accompanying balance sheets of ViroPharma Incorporated (A Development Stage Company) as of December 31, 1998 and 1999, and the related statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999 and for the period December 5, 1994 (Inception) to December 31, 1999. 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, the financial statements referred to above present fairly, in all material respects, the financial position of ViroPharma Incorporated (A Development Stage Company) as of December 31, 1998 and 1999, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1999 and for the period December 5, 1994 (Inception) to December 31, 1999, in conformity with generally accepted accounting principles. KPMG LLP Princeton, New Jersey February 23, 2000, except as to note 13 which is as of March 8, 2000 F-1 ViroPharma Incorporated (A Development Stage Company) Balance Sheets December 31, 1998 and 1999
December 31, ------------------------ 1998 1999 ----------- ----------- Assets Current assets: Cash and cash equivalents............................ $ 1,076,682 $ 6,984,707 Short-term investments............................... 18,935,100 59,868,213 Notes receivable from officers--current.............. 39,205 39,205 Other current assets................................. 435,054 1,068,764 ----------- ----------- Total current assets............................... 20,486,041 67,960,889 Equipment and leasehold improvements, net............ 2,477,105 3,469,927 Restricted investments............................... 550,000 550,000 Notes receivable from officers--noncurrent........... 62,356 23,151 Other assets......................................... 81,899 81,899 ----------- ----------- Total assets....................................... $23,657,401 $72,085,866 =========== =========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable..................................... $ 1,442,756 $ 1,187,234 Loans payable--current............................... 200,000 1,200,000 Deferred revenue--current............................ -- 1,000,000 Obligation under capital lease--current.............. 50,379 2,807 Accrued expenses and other current liabilities....... 7,302,511 5,879,589 ----------- ----------- Total current liabilities.......................... 8,995,646 9,269,630 Loans payable--noncurrent.............................. 1,822,917 525,000 Deferred revenue--noncurrent........................... -- 4,000,000 Obligation under capital lease--noncurrent............. 2,807 -- ----------- ----------- 10,821,370 13,794,630 ----------- ----------- Stockholders' equity: Preferred stock, par value $.001 per share. 5,000,000 shares authorized; Series A convertible participating preferred stock; 2,300,000 issued and outstanding at December 31, 1999; none at December 31, 1998 (liquidation value $14,547,031)............ -- 2,300 Series A junior participating preferred stock; 200,000 shares designated; no shares issued and outstanding........................................ -- -- Common stock, par value $.002 per share. Authorized 27,000,000 shares in 1998 and 1999; issued and outstanding 11,516,794 at December 31, 1998 and 15,066,612 at December 31, 1999................. 23,034 30,133 Additional paid-in capital........................... 61,373,998 136,259,509 Deferred compensation................................ (247,601) (44,580) Unrealized gains (losses) on available for sale securities.......................................... 107,562 (35,126) Deficit accumulated during the development stage..... (48,420,962) (77,921,000) ----------- ----------- Total stockholders' equity......................... 12,836,031 58,291,236 Commitments Total liabilities and stockholders' equity......... $23,657,401 $72,085,866 =========== ===========
See accompanying notes to financial statements. F-2 ViroPharma Incorporated (A Development Stage Company) Statements of Operations Years ended December 31, 1997, 1998 and 1999, and the period December 5, 1994 (Inception) to December 31, 1999
Period December 5, 1994 Year ended December 31, (Inception) ---------------------------------------- to December 1997 1998 1999 31, 1999 ------------ ------------ ------------ ------------ Revenues: License fee and milestones revenue... $ 1,500,000 $ 1,500,000 $ -- $ 4,000,000 Grant revenue......... -- -- -- 526,894 ------------ ------------ ------------ ------------ Total revenues...... 1,500,000 1,500,000 -- 4,526,894 ------------ ------------ ------------ ------------ Operating expenses incurred in the development stage: Research and development.......... 10,928,976 25,130,232 26,055,884 71,815,680 General and administrative....... 3,341,081 4,375,800 4,986,452 15,459,474 ------------ ------------ ------------ ------------ Total operating expenses........... 14,270,057 29,506,032 31,042,336 87,275,154 ------------ ------------ ------------ ------------ Loss from operations......... (12,770,057) (28,006,032) (31,042,336) (82,748,260) Interest income, net.... 1,320,174 1,603,916 1,542,298 4,827,260 ------------ ------------ ------------ ------------ Net loss............ $(11,449,883) $(26,402,116) $(29,500,038) $(77,921,000) ============ ============ ============ ============ Preferred stock dividends, including beneficial conversion component.............. -- -- 934,533 Beneficial conversion feature of preferred stock.................. -- -- 4,140,000 ------------ ------------ ------------ Net loss allocable to common stockholders.... $(11,449,883) $(26,402,116) $(34,574,571) ============ ============ ============ Basic and diluted net loss per share allocable to common stockholders:.......... $ (1.13) $ (2.30) $ (2.84) ============ ============ ============ Shares used in computing basic and diluted net loss per share allocable to common stockholders:.......... 10,092,590 11,485,589 12,181,853 ============ ============ ============
See accompanying notes to financial statements. F-3 ViroPharma Incorporated (A Development Stage Company) Statements of Comprehensive Loss Years ended December 31, 1997, 1998 and 1999, and the period December 5, 1994 (Inception) to December 31, 1999
Period December 5, 1994 Year ended December 31, (Inception) ---------------------------------------- to December 1997 1998 1999 31, 1999 ------------ ------------ ------------ ------------ Net loss................ $(11,449,883) $(26,402,116) $(29,500,038) $(77,921,000) ------------ ------------ ------------ ------------ Other comprehensive income (loss): Unrealized holding gains (losses) arising during period............... 276,126 107,562 (35,126) 433,615 Less: reclassification adjustment for gains included in net loss ..................... 58,311 276,126 107,562 468,741 ------------ ------------ ------------ ------------ Unrealized gains (losses) on available for sale securities.... 217,815 (168,564) (142,688) (35,126) ------------ ------------ ------------ ------------ Comprehensive loss...... $(11,232,068) $(26,570,680) $(29,642,726) $(77,956,126) ------------ ------------ ------------ ------------
See accompanying notes to financial statements. F-4 ViroPharma Incorporated (A Development Stage Company) Statements of Stockholders' Equity Period December 5, 1994 (Inception) to December 31, 1996, and years ended December 31, 1997, 1998 and 1999
Deficit Preferred Stock Common Stock Notes Unrealized gains Accumulated ----------------- ------------------- Additional Receivable (losses) on during the Number of Number of paid-in on common Deferred available for development Shares Amount Shares Amount capital stock compensation sale securities stage --------- ------- ----------- ------- ------------ ---------- ------------ ---------------- ------------ Balance, December 5, 1994 (Inception)...... -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ -- Issuance of common stock to founders........ -- -- 828,750 1,657 79,593 (1,625) (79,625) -- -- Proceeds from notes receivable...... -- -- -- -- -- 1,625 -- -- -- Deferred compensation resulting from grant of options......... -- -- -- -- 753,461 -- (753,461) -- -- Amortization of deferred compensation.... -- -- -- -- -- -- 171,749 -- -- Unrealized gains on available for sale securities...... -- -- -- -- -- -- -- 58,311 -- Issuance costs of Series A, B and C preferred stock........... -- -- -- -- (74,012) -- -- -- -- Exercise of common stock grant and options......... -- -- 72,420 145 6,955 -- -- -- -- Value attributed to issuance of warrants........ -- -- -- -- 109,920 -- -- -- -- Accretion of redemption value attributable to mandatorily redeemable convertible preferred stock........... -- -- -- -- (1,616,445) -- -- -- -- Conversion of preferred stock to common stock........... -- -- 5,588,191 11,177 16,253,022 -- -- -- -- Issuance of common stock, net of issuance costs........... -- -- 2,587,500 5,175 16,246,502 -- -- -- -- Net loss........ -- -- -- -- -- -- -- -- (10,568,963) --------- ------- ----------- ------- ------------ ------- --------- --------- ------------ Balance, December 31, 1996......... -- -- 9,076,861 18,154 31,758,996 -- (661,337) 58,311 (10,568,963) Amortization of deferred compensation.... -- -- -- -- -- -- 209,616 -- -- Unrealized gains on available for sale securities...... -- -- -- -- -- -- -- 217,815 -- Exercise of common stock options......... -- -- 15,450 31 7,070 -- -- -- -- Value attributed to issuance of warrants........ -- -- -- -- 15,936 -- -- -- -- Issuance of common stock, net of issuance costs........... -- -- 2,300,000 4,600 29,510,475 -- -- -- -- Cashless exercise of warrants........ -- -- 71,795 143 (143) -- -- -- -- Consulting expense related to option grants.......... -- -- -- -- 30,050 -- -- -- -- Net loss........ -- -- -- -- -- -- -- -- (11,449,883) --------- ------- ----------- ------- ------------ ------- --------- --------- ------------ Balance, December 31, 1997......... -- -- 11,464,106 22,928 61,322,384 -- (451,721) 276,126 (22,018,846) Amortization of deferred compensation.... -- -- -- -- -- -- 204,120 -- -- Unrealized loss on available for sale securities...... -- -- -- -- -- -- -- (168,564) -- Exercise of common stock options and warrants........ -- -- 52,688 106 23,613 -- -- -- -- Value attributed to issuance of warrants........ -- -- -- -- 15,936 -- -- -- -- Consulting expense related to option grants.......... -- -- -- -- 12,065 -- -- -- -- Net loss........ -- -- -- -- -- -- -- -- (26,402,116) --------- ------- ----------- ------- ------------ ------- --------- --------- ------------ Balance, December 31, 1998......... -- -- 11,516,794 23,034 61,373,998 -- (247,601) 107,562 (48,420,962) Amortization of deferred compensation.... -- -- -- -- -- -- 203,021 -- -- Unrealized loss on available for sale securities...... -- -- -- -- -- -- -- (142,688) -- Exercise of common stock options......... -- -- 99,818 199 292,051 -- -- -- -- Value attributed to issuance of warrants........ -- -- -- -- 11,959 -- -- -- -- Issuance of preferred stock, net of issuance costs........... 2,300,000 2,300 -- -- 13,308,600 -- -- -- -- Issuance of common stock, net of issuance costs........... -- -- 3,450,000 6,900 61,449,741 -- -- -- -- Consulting expense related to option grants.......... -- -- -- -- 4,860 -- -- -- -- Preferred dividends....... -- -- -- -- (181,700) -- -- -- -- Net loss........ -- -- -- -- -- -- -- -- (29,500,038) --------- ------- ----------- ------- ------------ ------- --------- --------- ------------ Balance, December 31, 1999......... 2,300,000 $ 2,300 15,066,612 $30,133 $136,259,509 -- $ (44,580) $ (35,126) $(77,921,000) ========= ======= =========== ======= ============ ======= ========= ========= ============ Total Stockholders' equity ------------- Balance, December 5, 1994 (Inception)...... $ -- Issuance of common stock to founders........ -- Proceeds from notes receivable...... 1,625 Deferred compensation resulting from grant of options......... -- Amortization of deferred compensation.... 171,749 Unrealized gains on available for sale securities...... 58,311 Issuance costs of Series A, B and C preferred stock........... (74,012) Exercise of common stock grant and options......... 7,100 Value attributed to issuance of warrants........ 109,920 Accretion of redemption value attributable to mandatorily redeemable convertible preferred stock........... (1,616,445) Conversion of preferred stock to common stock........... 16,264,199 Issuance of common stock, net of issuance costs........... 16,251,677 Net loss........ (10,568,963) ------------- Balance, December 31, 1996......... 20,605,161 Amortization of deferred compensation.... 209,616 Unrealized gains on available for sale securities...... 217,815 Exercise of common stock options......... 7,101 Value attributed to issuance of warrants........ 15,936 Issuance of common stock, net of issuance costs........... 29,515,075 Cashless exercise of warrants........ -- Consulting expense related to option grants.......... 30,050 Net loss........ (11,449,883) ------------- Balance, December 31, 1997......... 39,150,871 Amortization of deferred compensation.... 204,120 Unrealized loss on available for sale securities...... (168,564) Exercise of common stock options and warrants........ 23,719 Value attributed to issuance of warrants........ 15,936 Consulting expense related to option grants.......... 12,065 Net loss........ (26,402,116) ------------- Balance, December 31, 1998......... 12,836,031 Amortization of deferred compensation.... 203,021 Unrealized loss on available for sale securities...... (142,688) Exercise of common stock options......... 292,250 Value attributed to issuance of warrants........ 11,959 Issuance of preferred stock, net of issuance costs........... 13,310,900 Issuance of common stock, net of issuance costs........... 61,456,641 Consulting expense related to option grants.......... 4,860 Preferred dividends....... (181,700) Net loss........ (29,500,038) ------------- Balance, December 31, 1999......... $58,291,236 =============
- ----- See accompanying notes to financial statements. F-5 ViroPharma Incorporated (A Development Stage Company) Statements of Cash Flows Years ended December 31, 1997, 1998 and 1999, and the period December 5, 1994 (Inception) to December 31, 1999
Period December 5, 1994 Year ended December 31, (Inception) to ---------------------------------------- December 31, 1997 1998 1999 1999 ------------ ------------ ------------ -------------- Cash flows from operating activities: Net loss.............. $(11,449,883) $(26,402,116) $(29,500,038) $ (77,921,000) Adjustments to reconcile net loss to net cash used in operating activities: Non-cash compensation expense.............. 209,616 204,120 203,021 788,506 Non-cash warrant value................ 15,936 15,936 11,959 153,751 Non-cash consulting expense.............. 30,050 12,065 4,860 46,975 Depreciation and amortization expense.............. 288,278 428,165 556,639 1,331,104 Changes in assets and liabilities: Other current assets............... (264,460) 26,577 (633,710) (1,068,764) Notes receivable from officers............. (117,793) 16,232 39,205 (62,356) Other assets.......... (45,899) -- -- (81,899) Accounts payable...... 563,799 522,786 (255,522) 1,187,234 Deferred revenue...... -- -- 5,000,000 5,000,000 Accrued expenses and other current liabilities.......... 2,239,273 2,835,462 (1,529,172) 5,879,589 ------------ ------------ ------------ ------------- Net cash used in operating activities......... (8,531,083) (22,340,773) (26,102,758) (64,746,860) ------------ ------------ ------------ ------------- Cash flows from investing activities: Purchase of equipment and leasehold improvements......... (1,561,944) (959,575) (1,549,461) (4,801,031) Purchase of short- term investments..... (61,108,260) (26,206,929) (72,515,626) (186,185,484) Sales of short-term investments.......... 5,316,660 -- -- 9,680,414 Maturities of short- term investments..... 28,282,652 46,017,397 31,439,825 116,051,731 ------------ ------------ ------------ ------------- Net cash provided by (used in) investing activities......... (29,070,892) 18,850,893 (42,625,262) (65,254,370) ------------ ------------ ------------ ------------- Cash flows from financing activities: Net proceeds from issuance of preferred stock...... -- -- 13,310,900 27,242,143 Net proceeds from issuance of common stock................ 29,522,176 23,719 61,748,891 107,553,562 Preferred stock cash dividends............ -- -- (181,700) (181,700) Proceeds from loans payable and milestone advance.... 1,600,000 500,000 -- 2,100,000 Payment of loans payable.............. (83,333) (100,000) (191,667) (375,000) Proceeds received on notes receivable..... -- -- -- 1,625 Proceeds from notes payable.............. -- -- -- 692,500 Payment of notes payable.............. -- -- -- (50,000) Obligation under capital lease........ (42,848) (61,487) (50,379) 2,807 ------------ ------------ ------------ ------------- Net cash provided by financing activities......... 30,995,995 362,232 74,636,045 136,985,937 ------------ ------------ ------------ ------------- Net increase (decrease) in cash and cash equivalents........... (6,605,980) (3,127,648) 5,908,025 6,984,707 Cash and cash equivalents at beginning of period... 10,810,310 4,204,330 1,076,682 -- ------------ ------------ ------------ ------------- Cash and cash equivalents at end of period................ $ 4,204,330 $ 1,076,682 $ 6,984,707 $ 6,984,707 ============ ============ ============ ============= Supplemental disclosure of noncash transactions: Conversion of Note Payable to Series A and Series B Preferred Stock...... -- -- -- $ 642,500 Conversion of mandatorily redeemable convertible preferred stock to common shares........ -- -- -- 16,264,199 Notes issued for 828,750 common shares............... -- -- -- 1,625 Deferred compensation......... -- -- -- 833,086 Accretion of redemption value attributable to mandatorily redeemable convertible preferred stock...... -- -- -- 1,616,445 Conversion of milestone advance to loan payable......... -- $ 1,000,000 -- 1,000,000 Unrealized gains (losses) on available for sale securities........... $ 217,815 (168,564) $ (142,688) (35,126)
See accompanying notes to financial statements. F-6 ViroPharma Incorporated (A Development Stage Company) Notes to Financial Statements December 31, 1998 and 1999 1. Organization and Business Activities ViroPharma Incorporated (a development stage company) (the "Company") commenced operations on December 5, 1994. The Company is a development stage pharmaceutical company engaged in the discovery and development of new antiviral medicines. The Company is devoting substantially all of its efforts towards conducting drug discovery and development, raising capital, conducting clinical trials, pursuing regulatory approval for products under development, recruiting personnel and building infrastructure. In the course of such activities, the Company has sustained operating losses and expects such losses to continue for the foreseeable future. The Company has not generated any significant revenues or product sales and has not achieved profitable operations or positive cash flow from operations. The Company's deficit accumulated during the development stage aggregated $77,921,000 through December 31, 1999. There is no assurance that profitable operations, if ever achieved, could be sustained on a continuing basis. The Company plans to continue to finance its operations with a combination of stock and debt issuances, license payments, payments from strategic research and development arrangements and, in the longer term, revenues from product sales. There are no assurances, however, that the Company will be successful in obtaining an adequate level of financing needed for the long- term development and commercialization of its planned products. 2. Basis of Accounting and Summary of Significant Accounting Policies Cash and cash equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. All cash and cash equivalents are held in United States (U.S.) financial institutions. Short-term investments Short-term investments consist primarily of debt securities backed by the U.S. government. The Company's entire short-term investment portfolio is currently classified as available for sale and is stated at fair value as determined by quoted market values. Changes in the net unrealized holding gains and losses are included as a separate component of stockholders' equity and comprehensive loss. For purposes of determining gross realized gains and losses, the cost of short-term investments sold is based upon specific identification. The Company has not experienced any significant realized gains or losses on its investments through December 31, 1999. Concentration of credit risk The Company invests its excess cash and short-term investments in accordance with a policy objective that seeks to ensure both liquidity and safety of principal. The policy limits investments to certain types of instruments issued by the U.S. government and institutions with strong investment grade credit ratings and places restrictions in their terms and concentrations by type and issuer. Equipment and leasehold improvements Equipment and leasehold improvements are recorded at cost. Depreciation and amortization is computed on a straight-line basis over the useful lives of the assets or the lease term, whichever is shorter, ranging from two to ten years. F-7 ViroPharma Incorporated (A Development Stage Company) Notes to Financial Statements The Company leases certain of its equipment and facilities under operating leases. Operating lease payments are charged to operations over the related period that such leased equipment is utilized in service. Assets and liabilities related to capital leases are recorded at the present value of the future minimum rental payments using interest rates appropriate at the inception of the lease. Capital lease amortization is included with depreciation and amortization expense. Expenditures for repairs and maintenance are expensed as incurred. Research and development Research and product development costs are expensed as incurred. Licensed technology Costs incurred in obtaining the license rights to technology in the research and development stage are expensed as incurred and in accordance with the specific contractual terms of such license agreements. Accounting for income taxes Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits which are not expected to be realized. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. Revenue recognition--collaborative research, contract and license agreements Collaborative research revenue from cost-reimbursement and grant agreements are recorded when earned, up to the contractual limits. Contract and licensing revenue is recognized when milestones are met and the Company's specific performance obligations have been satisfied in accordance with the terms of the respective agreements. Cash received that is related to future performance under such contracts is deferred and recognized as revenue when earned. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Stock-based compensation The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation cost is measured on the date of grant as the excess of the current market price of the underlying stock over the exercise price. Such compensation amounts are amortized over the respective vesting periods of the option grant. The Company adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to provide pro forma net income (loss) and pro forma earnings (loss) per share disclosures for employee stock option grants as if the fair-value based method defined in SFAS No. 123 had been applied. F-8 ViroPharma Incorporated (A Development Stage Company) Notes to Financial Statements Segment Information The Company is managed and operated as one business. The entire business is managed by a single management team that reports to the chief executive officer. The Company does not operate separate lines of business or separate business entities with respect to any of its product candidates. Accordingly, the Company does not prepare discrete financial information with respect to separate product areas or by location and does not have separately reportable segments as defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". Net loss per share Basic earnings per share ("EPS") is calculated by dividing earnings (loss) allocable to common stockholders by the weighted average shares of common stock outstanding. Net loss allocable to common stockholders includes preferred stock dividends and beneficial conversion features of preferred stock. Diluted EPS would also include the effect of dilution to earnings of convertible securities, stock options and warrants. As of December 31, 1999, the Company has certain convertible preferred stock, options and warrants which have not been used in the calculation of diluted net loss per share allocable to common stockholders because to do so would be anti-dilutive. As such, the numerator and denominator used in computing both basic and diluted net loss per share allocable to common stockholders are equal. Comprehensive Loss SFAS No. 130, "Reporting Comprehensive Income" establishes standards for reporting and presentation of comprehensive loss and its components in a full set of financial statements. Comprehensive loss consists of net loss and net unrealized gains (losses) on securities and is presented in the statements of comprehensive loss. The Statement requires only additional disclosures in the financial statements; it does not affect the Company's financial position or results of operations. 3. Short-Term Investments Short-term investments consist of fixed income securities with original maturities of greater than three months but less than one year including U.S. treasury instruments of agencies of the U.S. Government and high-grade commercial paper. At December 31, 1998 and 1999, all of the short-term investments were deemed as "available for sale" investments. The following summarizes the "available for sale" investments at December 31, 1998 and 1999:
Gross Gross unrealized unrealized Cost gains losses Fair value ----------- ---------- ---------- ----------- Obligations of the U.S. Government and agencies of the U.S.............. 1,953,858 50,522 -- 2,004,380 Commercial paper......... 16,873,680 70,769 13,729 16,930,720 ----------- -------- -------- ----------- December 31, 1998...... $18,827,538 $121,291 $ 13,729 $18,935,100 =========== ======== ======== =========== Commercial paper......... 59,903,339 153,371 188,497 59,868,213 ----------- -------- -------- ----------- December 31, 1999...... $59,903,339 $153,371 $188,497 $59,868,213 =========== ======== ======== ===========
F-9 ViroPharma Incorporated (A Development Stage Company) Notes to Financial Statements 4. Equipment and Leasehold Improvements Equipment and leasehold improvements consist of the following at December 31, 1998 and 1999:
1998 1999 ---------- ---------- Computers and equipment............................ $2,266,787 $2,751,717 Leasehold improvements............................. 899,838 1,931,626 ---------- ---------- 3,166,625 4,683,343 Less accumulated depreciation and amortization..... 689,520 1,213,416 ---------- ---------- $2,477,105 $3,469,927 ========== ==========
Included in equipment and leasehold improvements at December 31, 1998 is assets totaling approximately $215,000 held under capital lease. Included in equipment and leasehold improvements at December 31, 1999 is assets totaling approximately $150,000 held under capital lease. Included in leasehold improvements at December 31, 1999 is $923,900 related to construction in progress. At December 31, 1998, the Company had no construction in progress. 5. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following at December 31, 1998 and 1999:
December 31, --------------------- 1998 1999 ---------- ---------- Preferred stock dividends payable.................. -- 181,700 Clinical development and research.................. 6,970,839 3,407,567 Marketing.......................................... 122,484 -- Payroll and payroll taxes payable.................. 116,580 1,583,871 Other current liabilities.......................... 92,608 706,451 ---------- ---------- $7,302,511 $5,879,589 ========== ==========
6. Loans Payable The Company entered into two loan agreements with a bank, one for $600,000 and one for $500,000, of which $916,667 was outstanding at December 31, 1998, and $725,000 was outstanding at December 31, 1999. The terms of the loans extend through February and December 2003, respectively, with principal and interest due monthly. The interest rates are approximately 9% and 7.25% respectively and are secured by certain equipment and certificates of deposit aggregating $550,000. In October 1997, the Company received a $1,000,000 payment as an advance on a future milestone in connection with a collaborative drug discovery and development agreement with Boehringer Ingelheim Pharmaceuticals Inc. ("BI"). The agreement expired in August 1998. Such amount is due and payable in August 2000. The loan bears interest at 8.5% and is evidenced by a convertible promissory note. If amounts due under the note are not paid as described in the note, BI may convert the then outstanding principal balance and accrued interest thereon into shares of the Company's common stock based on the last sale price of such common stock on the date immediately prior to the date on which the Company is notified of BI's intention to convert the promissory note. F-10 ViroPharma Incorporated (A Development Stage Company) Notes to Financial Statements 7. License and Research Agreements In December 1995, the Company entered into a license agreement with Sanofi S.A. ("Sanofi") for its most advanced drug candidate, pleconaril. At December 31, 1997, an estimated milestone payable to Sanofi of $2 million was recorded. In June 1998, Sanofi chose to have the Company be solely responsible for all development and development costs of pleconaril. As a result of this decision by Sanofi, the milestone payable of $2 million was reduced to $1.2 million, which was paid in 1998. Also, the Company will receive a higher royalty on sales of pleconaril by Sanofi outside of the United States and Canada, and Sanofi reimbursed the Company $400,000 for a license fee previously paid by the Company. The reduction to the milestone payable by $800,000 and the $400,000 reimbursement of the previously paid license fee were recorded as a reduction of research and development expenses in 1998. Under the Company's agreement with Sanofi, the Company is required to make certain additional payments to Sanofi, including royalties, as defined, should agreed-upon future milestones be attained. The milestone events contemplate regulatory submissions of new drug applications and regulatory approvals in various jurisdictions. There can be no assurance that any milestones will be attained. Also, if foreign regulatory authorities require significant additional studies of pleconaril for use in the European Union, the Company would be required to conduct such studies at its own expense. In December 1999, the Company entered into a licensing agreement with American Home Products for the discovery, development and commercialization of hepatitis C drugs. In connection with the signing of the agreement, the Company received $5,000,000 from American Home Products. This amount is non- refundable and is recorded as deferred revenue at December 31, 1999. This will be recognized as revenue as certain activities are performed by the Company over the expected term of the agreement. If drug candidates are successfully commercialized, the Company has the right to co-promote the products and share equally in the net profits in the United States and Canada. The Company is entitled to milestones and royalties for activities outside of the United States and Canada. The Company has entered into various licensing, research and other agreements. Under these agreements, the Company is working in collaboration with various other parties. Should any discoveries be made under such arrangements, the Company would be required to negotiate the licensing of the technology for the development of the respective discoveries. There are no significant funding commitments under any other agreement other than Sanofi. In July 1996, the Company entered into a collaborative drug discovery and development agreement with BI for one hepatitis C target identified by the Company. Under this agreement, the Company granted to BI the exclusive worldwide rights to develop and commercialize compounds discovered under the agreement. In return, BI paid a non-refundable technology access fee of $1,000,000 to the Company and was required to make certain research and milestone payments, as defined, to the Company in connection with the Company's transfer of HCV screening and assay technology and at various stages in the development of compounds under the agreement. The Company earned $1,500,000 in each of 1997 and 1998 for achieving two milestones in each year. 8. Common Stock and Common Stock Options On July 23, 1997, the Company completed a follow-on public offering of common stock. The Company sold 2,300,000 shares (including 300,000 shares exercised by the underwriters for the overallotment). Net proceeds approximated $29,515,000. On October 21, 1999, the Company completed a follow-on public offering of common stock. The Company sold 3,450,000 shares (including 450,000 shares exercised by the underwriters for overallotment). Net proceeds approximated $61,450,000. F-11 ViroPharma Incorporated (A Development Stage Company) Notes to Financial Statements In 1995, the Company adopted a Stock Option Plan, and amended and restated the Stock Option Plan in 1998 (as amended and restated, the "Plan"), to provide eligible individuals with an opportunity to acquire or increase an equity interest in the Company and to encourage such individuals to continue in the employment of the Company. Stock options are granted at the fair market value of the stock on the day immediately preceding the date of grant. Stock options are exercisable for a period not to exceed ten years from the date of grant. Vesting of the stock options occurs, generally 25% per year, over four years. There are 2,000,000 shares reserved under the Plan. Stock option activity for the three years ended December 31, 1999 is as follows:
Weighted- average Weighted- remaining average Exercise contractual exercise price per Share life price per share options (years) share ------------- --------- ----------- --------- Balance, December 31, 1996..... $ .10-5.25 435,783 ========= Granted....................... 8.75-22.50 335,233 Exercised..................... .10-.8.75 (15,450) Canceled...................... 2.16-8.75 (555) ------------- --------- Balance, December 31, 1997..... .10-22.50 755,011 --------- Granted....................... 9.94-23.50 330,700 Exercised..................... .10-8.75 (35,065) Canceled...................... 2.16-8.75 (500) ------------- --------- Balance, December 31, 1998..... .10-23.50 1,050,146 --------- Granted....................... 6.50-27.9375 385,100 Exercised..................... .10-20.375 (99,818) Canceled...................... .45-20.375 (60,763) ------------- --------- Balance, December 31, 1999..... .10-27.9375 1,274,665 ============= ========= Options outstanding as of December 31, 1999:............ .10-.20 179,848 5.61 $ .16 .45 1,836 6.42 .45 2.16 84,492 6.51 2.16 5.25 21,695 6.84 5.25 6.50 22,000 9.20 6.50 7.40-8.00 6,000 9.40 7.64 8.38 20,000 9.37 8.38 8.75-9.50 197,850 7.01 8.75 9.875-14.75 353,635 8.83 11.56 15.125-22.50 377,309 8.24 17.94 23.50-27.9375 10,000 9.25 25.72 ------------- --------- Balance, December 31, 1999..... .10-27.9375 1,274,665 7.74 10.61 ============= ========= Options exercisable as of December 31, 1999:............ .10-.20 147,438 $ .15 .45 1,224 .45 2.16 61,019 2.16 5.25 15,830 5.25 8.75 105,100 8.75 9.875-14.75 23,400 11.06 15.125-22.50 115,724 17.65 ------------- --------- Options exercisable at December 31, 1999...................... $ .10-22.50 469,735 $ 7.37 ============= =========
F-12 ViroPharma Incorporated (A Development Stage Company) Notes to Financial Statements At December 31, 1999, there were 553,582 shares available for grant under the Plan. In January 2000, the Company granted 303,700 options to its employees. Such options were granted at exercise prices equal to the fair market value at the grant date. During 1996, various executive officers and certain employees of the Company were granted options to acquire 270,644 shares of common stock at exercise prices ranging from $.20 to $2.16 per share. The exercise price of the options was equal to the fair market value of the Common Stock on the date of grant, as determined by the Board of Directors. However, for financial statement purposes, the difference between a deemed value in the range of $2.35 to $5.25 per share and the respective exercise prices at the grant dates has been recorded as deferred compensation ($753,461) and is being amortized over the four-year vesting period. Compensation expense for the aforementioned options aggregated $193,691 for the year ended December 31, 1997, $188,195 for the year ended December 31, 1998, and $203,021 for the year ended December 31, 1999. The per share weighted-average fair value of stock options granted during 1997, 1998 and 1999 was $8.66, $14.82, and $11.61 per share, respectively, on the date of grant. Such fair values were determined using the Black-Scholes option-pricing model and are based on the following weighted-average assumptions: an expected dividend yield of 0% and a risk-free interest rate of 7.5%, for 1997, 5.0% for 1998 and 6.45% for 1999; volatility of 68% for 1997, 79% for 1998, and 135% for 1999 and an expected option life of ten years for 1997, 1998 and 1999. The Company applies APB Opinion No. 25 in accounting for its stock option plan. Had the Company determined compensation cost for options granted based on the fair value at the grant date under SFAS No. 123, the Company's net loss and net loss per share would have been increased to the pro forma amounts under SFAS No. 123 indicated below:
1997 1998 1999 ------------ ------------ ------------ Net loss allocable to common stockholders: As reported.................... $(11,449,883) $(26,402,116) $(34,574,571) Pro forma under SFAS No. 123... $(12,308,195) $(28,511,508) $(37,626,511) ============ ============ ============ Net loss per share allocable to common stockholders: Basic and diluted: As reported.................. $ (1.13) $ (2.30) $ (2.84) Pro forma under SFAS No. 123......................... $ (1.22) $ (2.48) $ (3.09) ============ ============ ============
Pro forma net loss allocable to common stockholders reflects only options granted in 1995 through 1999. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss allocable to common stockholders amounts presented above because compensation cost is incurred under SFAS No. 123 over the respective vesting period of such options, and options granted by the Company prior to January 1, 1995 are not reflected in the pro forma net loss allocable to common stockholders figures above. 9. Preferred Stock The Company adopted a Stockholders' Rights Plan (the "Plan") in September 1998. In connection with the Plan, the Company designated from its preferred stock, par value $.001 per share, Series A Junior Participating Preferred Stock, par value $.001 per share (the "Series A Preferred Shares"), and reserved 200,000 Series A Preferred Shares for issuance under the Plan. The Company declared a dividend distribution of one right for each outstanding share of common stock. The rights entitle stockholders to purchase one one-hundredth F-13 ViroPharma Incorporated (A Development Stage Company) Notes to Financial Statements of a share of Series A Junior Participating Preferred stock. The rights expire in 2008. Each holder of a right other than the acquiring person, would be entitled to purchase $250 worth of common stock of the Company for each right at the exercise price of $125 per right, which would effectively enable such rights holders to purchase common stock at one-half of the then current price. At December 31, 1999, the rights were neither exercisable nor traded separately from the company's common stock, and become exercisable only if a person or group becomes the beneficial owner of 20% or more of the Company's common stock or announces a tender offer which would result in ownership of 20% or more of the Company's common stock. On May 5, 1999, the Company completed the sale of 2,300,000 shares of Series A Convertible Participating Preferred Stock ("preferred stock"). Net proceeds approximated $13,300,000. In addition, the Company issued warrants to purchase 595,000 shares of common stock at $9.53 per share to the purchasers of the preferred stock. The warrants expire on May 5, 2004. The preferred stock is convertible into shares of common stock on a one-for-one basis (subject to adjustment) at any time by the holder and under certain conditions by the Company. There is a 5% dividend per annum associated with the preferred stock in which the Company may choose to permanently defer cash payment of the dividend. In such case, the dividend is added to the liquidation value of the preferred stock and the preferred stock's conversion ratio is increased. The holders of the preferred stock have voting rights equivalent to the common stockholders. In addition, the holders of the preferred stock have liquidation rights equal to their original investment, subject to adjustment. As a result of the difference in the price paid per share of preferred stock and the fair market value per share of the underlying common stock at the date of the closing of the transaction, the Company has reflected the amount of the beneficial conversion feature in the statement of operations for the year ended December 31, 1999. The beneficial conversion feature aggregated $4,140,000 and is included in the net loss allocable to common stockholders. The Company deferred the June 30 and September 30, 1999 dividends and as a result, the difference between the conversion price per share of preferred stock and the fair market value per share of the underlying common stock at June 30 and September 30, 1999 has been reflected as a beneficial conversion feature in the statement of operations for the year ended December 31, 1999. The fair market values were determined using the closing prices as quoted on Nasdaq. The beneficial conversion feature related to the quarterly preferred stock dividends aggregated $465,802 and is included in the net loss allocable to common stockholders for the year ended December 31, 1999. At December 31, 1999, the preferred stock is convertible into 2,346,295 shares of common stock. 10. Income Taxes As of December 31, 1999, the Company has approximately $21,300,000 of Federal and $19,900,000 of state net operating loss carryforwards available to offset future taxable income. The federal and state net operating loss carryforwards will begin expiring in the year 2009 and 2005, respectively, if not utilized. In addition, the utilization of the state net operating loss carryforwards is subject to a $2 million annual limitation. Based on "change in ownership" provisions of the Tax Reform Act of 1986, net operating loss carryforwards may be subject to annual limitations that could reduce the Company's ability to utilize these carryforwards in the future. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1998 and 1999 are shown below. Due to the uncertainty of the Company's ability to realize the benefit of the deferred tax assets, the net deferred tax assets are fully offset by a valuation allowance at December 31, 1998 and 1999. The change in the valuation allowance for 1998 and 1999 was an increase of $10,466,032 and $11,901,661, respectively. F-14 ViroPharma Incorporated (A Development Stage Company) Notes to Financial Statements
December 31, -------------------------- 1998 1999 ------------ ------------ Deferred tax assets: Net operating loss carryforwards.................. $ 4,182,587 $ 8,483,527 Capitalized research and development costs........ 14,952,831 22,539,989 Expenses not currently deductible................. -- -- Capitalized start up costs........................ 11,917 -- ------------ ------------ Total gross deferred tax assets................. 19,147,335 31,023,516 ------------ ------------ Deferred tax liability: Employee compensation............................. 25,480 -- ------------ ------------ Net deferred tax assets......................... 19,121,855 31,023,516 Valuation allowance................................. (19,121,855) (31,023,516) ------------ ------------ Net deferred taxes.............................. -- -- ============ ============
11. 401(k) Profit Sharing Plan In 1998, the Company adopted a new 401(k) Profit Sharing Plan (the "401(k) Plan") available to all employees meeting certain eligibility criteria. The 401(k) Plan permits participants to contribute up to 15% of their compensation not to exceed the limits established by the Internal Revenue Code. All contributions made by participants vest immediately in the participant's account. The Company contributed none, $47,768, and $61,306 to the 401(k) Plan in 1997, 1998 and 1999, respectively. 12. Commitments In March 1998, the Company entered into a lease for laboratory and office space. The term of the lease is ten years with two five-year renewal options. The Company also has the right, under certain circumstances, to purchase the facility. The Company's future minimum lease payments under the aforementioned leases and a capital lease related to equipment for years subsequent to December 31, 1999 are as follows:
Year ending Operating Capital December 31, leases leases ------------ ---------- ------- 2000................................................... 683,514 2,870 2001................................................... 677,604 -- 2002................................................... 672,140 -- 2003................................................... 661,212 -- 2004................................................... 658,942 -- Thereafter............................................. 2,050,708 -- ---------- ------ Total minimum lease payments......................... $5,404,120 $2,870 ========== ====== Amounts representing interest............................ $ (63) ------ Present value of net minimum lease payments.............. $2,807 Current portion.......................................... $2,807 ------ Long term portion........................................ $ -- ======
Rent expense for the years ended December 31, 1997, 1998, and 1999 aggregated $394,000, $760,000, and $851,000, respectively. F-15 ViroPharma Incorporated (A Development Stage Company) Notes to Financial Statements 13. Subsequent Events The Company made a private offering of $180 million of Convertible Subordinated Notes due 2007, which closed on March 8, 2000. Net proceeds from the issuance of convertible subordinated notes were approximately $174,400,000. The notes are convertible into shares of the Company's common stock at a price of $109.15 per share, subject to certain adjustments. The notes bear interest at a rate of 6 % per annum, payable semi-annually in arrears, and can be redeemed by the Company, at certain premiums over the principal amount, at any time on or after March 6, 2003. The notes are subordinated in right of payment to all senior indebtedness of the Company. The notes may be required to be repaid on the occurance of certain fundamental changes, as defined. F-16 EXHIBIT INDEX
Exhibit Description -------- ----------- 10.24 Product Development and Commercialization Agreement dated November 19, 1999 between Battelle Memorial Institute and ViroPharma Incorporated. 10.25 Collaboration and License Agreement dated December 9, 1999 between American Home Products Corporation, acting through its Wyeth-Ayerst Laboratories Division, and ViroPharma Incorporated. 10.26 Stock Purchase Agreement dated December 9, 1999 between American Home Products Corporation and ViroPharma Incorporated. 11 Statement of Computation of Loss Per Share. 23 Consent of KPMG LLP. 24 Power of Attorney (included on signature page). 27 Financial Data Schedule.
EX-10.24 2 PRODUCT DEVELOPMENT AND COMMERCIALIZATION AGREEMENT EXHIBIT 10.24 Portions of this exhibit were omitted and filed separately with the Secretary of the Commission pursuant to an application for confidential treatment filed with the Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. Such portions are marked by a series of asterisks. PRODUCT DEVELOPMENT AND COMMERCIALIZATION AGREEMENT This Product Development and Commercialization Agreement (the "Agreement") dated as of the 19th day of November, 1999 (the "Effective Date") is made and entered into by and between ViroPharma Incorporated, a Delaware corporation having its principal place of business at 405 Eagleview Boulevard, Exton, PA 19341 ("ViroPharma"), and Battelle Memorial Institute, an Ohio non-profit corporation, having a principal place of business at 505 King Avenue, Columbus, OH 43201, through its Battelle Pulmonary Therapeutics Division ("BPTD"). ViroPharma and BPTD may be referred to herein as a "Party" or, collectively, as "Parties." BACKGROUND In consideration of the covenants and promises contained in this Agreement, and intending to be legally bound, the Parties agree as follows: 1. DEFINITIONS. As used herein, the following capitalized terms shall have the following meanings when used in this Agreement, and all terms defined in the singular shall have the same meanings when used in the plural (and vice versa, as appropriate), unless otherwise specified: 1.1 "Affiliate" means a corporation, partnership, entity, person, firm, company, or joint venture, whether de jure or de facto, that controls, is controlled by or is under the common control with the referenced Party. For the purposes of this definition the word "control" (including, with correlative meaning, the terms "controlled by" or "is under the common control with") means (a) ownership directly or indirectly of at least fifty percent (50%) of the voting stock of the applicable entity, or such lesser percentage that is the maximum allowed to be owned by a foreign corporation in a particular jurisdiction, or (b) the actual ability to control the management and operations of the applicable entity. 1.2 "Approval Application" means any application to a Regulatory Authority, required to be approved by such Regulatory Authority before marketing the Drug Inhalation System in a particular country, and may include, without limitation a New Drug Application, Abbreviated New Drug Application, 510(k) Premarketing Notification, and/or a Premarket Application, and analogous foreign regulatory filings. - ------------------------------------------------------------------------------- November 19, 1999 ViroPharms-BPTD Agreement Page 1 1.3 "BPTD Invention" means any Invention that covers the EHD Device, the Drug Container, or the Drug Vehicle, or any method of making or using the EHD Device, the Drug Container, or the Drug Vehicle in the Field, which Invention is made during the Term of this Agreement. 1.4 "BPTD Patent" means any Patent owned or Controlled by BPTD or a BPTD Affiliate during the term of the Agreement that generically or specifically claims or covers the manufacture, use, sale, or offer for sale, import or export of the EHD Device, the Drug Container, or the Drug Vehicle. Attached hereto as Exhibit A is a list of BPTD Patents existing as of the Effective Date, which Exhibit A shall be updated by BPTD on at least a semiannual basis during the term of the Agreement, provided, however, that unintentional omission of Patents from such Exhibit A shall not constitute a breach of the Agreement, nor shall it limit the scope of the defined term "BPTD Patent." 1.5 "BPTD Technology" means all BPTD Patents and BPTD Inventions, and all Information reasonably necessary for ViroPharma to practice the rights granted and fulfill the responsibilities imposed in this Agreement, and all copyrights relating to the Drug Inhalation System, that BPTD or a BPTD Affiliate owns or Controls during the term of the Agreement. 1.6 "Commercialization Plan" means the plan developed by ViroPharma for the distribution, marketing and sale of the Drug Inhalation System. 1.7 "cGMPs" means the then current standards for manufacture of pharmaceuticals and pharmaceutical delivery devices, as set forth in the United States Federal Food, Drug, and Cosmetic Act and applicable regulations promulgated thereunder, as amended from time to time, and such standards of good manufacturing practice as are required by the European Union and other organizations and governmental agencies in countries in which the Drug Inhalation System is intended to be sold. 1.8 (a) "Confidential Information" means all secret, confidential or proprietary information or data, whether provided in written, oral, graphic, video, computer or other form, provided by one Party (the "Discloser") to the other Party ("Disclosee") pursuant to this Agreement or the Confidential Disclosure Agreement between the Parties dated January 20, 1999, or generated pursuant to this Agreement, including but not limited to information relating to the Discloser's existing or proposed research, development efforts, business or products, the terms of this Agreement and any other materials that have not been made available by the Discloser to the general public. (b) Notwithstanding the foregoing Section 1.8(a), Confidential Information shall not include any information or materials that: (i) at the time of disclosure by the Discloser to the Disclosee are in, or after such disclosure become part of, the - -------------------------------------------------------------------------------- November 19, 1999 ViroPharms-BPTD Agreement Page 2 public domain, through no improper act on the part of the Disclosee or any of its officers, employees, or agents; (ii) was in the Disclosee's possession at the time that such information was first disclosed by the Discloser, as shown by written evidence, and was not acquired, directly or indirectly, from the Discloser; (iii) the Disclosee receives from a third party, provided that such information was not obtained by such third party, directly or indirectly, from the Discloser; (iv) are required to be disclosed pursuant to valid law, regulation or court order; or (v) was independently developed by Disclosee employees having no access to the Confidential Information. 1.9 "Control" means, with respect to a material, Information or intellectual property right, possession by a Party of the ability to grant access to or a license or sublicense as provided for herein under such material, Information or right without violating the terms of any agreement or other arrangements with any Third Party existing at the time such Party would be first required hereunder to grant the other Party such access or license or sublicense. 1.10 "Development Activities" means all activities performed pursuant to the Development Plan and this Agreement. 1.11 "Development Plan" means the detailed written work plan prepared in accordance with Section 3.2.1, as such plan may be amended from time to time. 1.12 "Device Specifications" means the analytical and design specifications for the EHD Device and the Drug Container, prepared and modified in accordance with Section 3.2.3(a), and incorporated into this Agreement by reference. 1.13 "Diligent Efforts" means efforts that are no less than the applicable efforts that a Party applies to the development, manufacture or commercialization of its own compounds or products with similar regulatory requirements and market potential. 1.14 "Drug" means a Small Molecule for use in the Field, and shall include, without limitation VP 14637. 1.15 "Drug Container" means the container developed or identified for ViroPharma for the Formulated Drug, all connectors, adapters and other equipment necessary to permit the attachment of the container to and incorporation of the container into the EHD Device, all connectors, adapters and other equipment necessary to permit the container to be attached to a device to fill the container with Formulated Drug, and all labels, labeling and packaging for such container. 1.16 "Drug Inhalation System" means the EHD Device and Packaged Drug combined and assembled together for use in the Field by a patient or subject. 1.17 "Drug Master File" or "DMF" means Information and materials, or the applicable part thereof, submitted to a Regulatory Authority, providing - -------------------------------------------------------------------------------- November 19, 1999 ViroPharms-BPTD Agreement Page 3 information on the manufacturing facilities and manufacturing processes for making a Drug Inhalation System or component thereof, including, without limitation, activities relating to manufacturing, processing, formulating, packaging and storage to be conducted by or under the direction of BPTD or its Affiliates, which Information may be used to support Regulatory Approval of the Drug Inhalation System in a country. For purposes of this Agreement, the Drug Master File shall include, without limitation, chemistry, manufacturing and control information, as defined in the FDA regulations at 21 CFR Section 314.50(d). 1.18 "Drug Vehicle" means the combination of all excipients, active, and inactive ingredients developed for ViroPharma other than the Drug, with which the Drug is mixed to permit the Pulmonary Delivery of the Drug via the EHD Device. 1.19 "EHD Device" means the hand-held, single-user, disposable device developed by BPTD for ViroPharma for the electrohydrodynamic delivery of Drugs by inhalation, including, without limitation, any removable mouthpiece or mask for use by patients, and any other equipment or accessories necessary for a patient to use the device in accordance with its approved labeling and supplied together with the device, all of which meet the Specifications. 1.20 "FDA" means the United States Food and Drug Administration, or the successor thereto. 1.21 "Field" means the treatment and/or prevention of the effect on humans of respiratory syncytial viruses ("RSV") by Pulmonary Delivery of one or more Small Molecules not in a formulation or in a combination with one or more ********** or **********, but not the treatment and/or prevention of the effect on humans of RSV by Pulmonary Delivery of one or more ********** or ********** alone or in a formulation or in a combination with one or more Small Molecules. 1.22 "First Commercial Sale" means, on a country by country basis, the first sale of the Drug Inhalation System to a Third Party after Regulatory Approval. 1.23 "Formulated Drug" means the combined, formulated Drug and Drug Vehicle. 1.24 "Full Royalty Rate Period" for the Drug Inhalation System in any given country means the period during which ViroPharma's distribution and/or sale of the Drug Inhalation System in the applicable country, in the absence of the rights and licenses granted by this Agreement, would have infringed a BPTD Patent. 1.25 "Information" means information and data of any type whatsoever, in any tangible or intangible form, including without limitation inventions, practices, methods, techniques, specifications, formulations, formulae, knowledge, know-how, skill, experience, trade secrets, test data including pharmacological, - -------------------------------------------------------------------------------- November 19, 1999 ViroPharms-BPTD Agreement Page 4 biological, chemical, biochemical, toxicological and clinical test data, analytical and quality control data, stability data, studies and procedures, and patent and other legal information or descriptions. 1.26 "Invention" means any invention, modification, discovery, improvement, technology, trade secret, chemical or biological material, assay, method, process, technique, documentation, scientific and technical data, drawing or other information, whether patentable or not, relating to a Drug, Drug Vehicle, Formulated Drug, Drug Container, or EHD Device, or any method of making or using such Drug, Drug Vehicle, Formulated Drug, Drug Container, or EHD Device in the Field. 1.27 "Major Markets" means Austria, Belgium, Canada, Denmark, Finland, France, Germany, Indonesia, Ireland, Italy, Japan, Mexico, Netherlands, Portugal, Spain, Sweden, the United Kingdom, the United States. 1.28 "Net Sales" means the total amount invoiced or otherwise charged by ViroPharma or its Affiliates to customers or Third Party licensees on account of the sale of the Drug Inhalation System, less the following deductions: (a) deductions, credits, allowances, and discounts actually granted for spoiled, damaged, out-dated and returned units of the Drug Inhalation System (including withdrawals and recalls); (b) rebates (including Medicaid, managed care rebates and other similar types of rebates, e.g. chargebacks); (c) freight and insurance costs for transporting the Drug Inhalation System which are included in the billed amount; (d) sales, use, excise, value-added and other direct taxes on the sale of the Drug Inhalation System; (e) customs duties, surcharges and other governmental charges incurred in connection with the exportation or importation of the Drug Inhalation System; (f) trade, cash, and quantity discounts off the invoiced price and similar promotional discounts or rebates (such as management fees required by hospital buying groups or granted to managed care organizations) off the invoiced price, and (g) amounts reflecting retroactive price adjustments on sale of products, to the extent not previously deducted from net sales, but only to the extent such adjustment is not made more than one year after the sale; all of the foregoing to the extent consistent with the normal practice in the industry, and provided that any and all of the foregoing are calculated in accordance with United States generally accepted accounting principles consistently applied. Included in Net Sales shall be any disposition of a Drug Inhalation System or component thereof for value, and if for other than cash, such disposition to be converted to a cash amount equal to the amount such system or components are sold to others. 1.29 "Packaged Drug" means Formulated Drug packaged in a finished Drug Container. 1.30 "Patent" means (a) all patent applications heretofore or hereafter filed or having legal force in any country; (b) all patents that have issued or in the future issue - -------------------------------------------------------------------------------- November 19, 1999 ViroPharms-BPTD Agreement Page 5 therefrom, including without limitation utility, model and design patents and certificates of invention; and (c) all divisionals, continuations, continuations-in-part, reissues, renewals, extensions (including supplemental protection certificates), additions, registrations or confirmations to or of any such patent applications and patents. 1.31 "Pulmonary Delivery" means a. the administration of any substance by: i. inhalation through the mouth, or ii. simultaneous inhalation through the mouth and nose, or iii. where inhalation through the mouth is not possible or reasonably practicable due to the patient's condition, inhalation through the nose, in each case to the lungs and/or to the trachea (including necessary incidental non-therapeutic and non-functional [i.e., not for diagnosis, prevention or treatment of disease] delivery to the mouth, nose and throat as a result of such inhalation) for the purpose of diagnosis, prevention or treatment of disease; b. the administration of any substance to the lungs, trachea, mouth, throat or nasal passages by inhalation through the mouth and/or nose for the treatment, prevention, or diagnosis of all cancers of the respiratory tract; and c. where it can be shown by clinical trials that treatment or prevention of a particular disease by delivery of a substance to the lungs and/or the trachea in accord with Section 1.31(a) above is significantly improved by simultaneous delivery of the same substance to the mouth and/or throat then "Pulmonary Delivery" will be extended to include delivery under Section 1.31(a) above together with simultaneous delivery of the same substance to the mouth and/or throat for the prevention or treatment of that disease. For the avoidance of doubt, "Pulmonary Delivery" shall not include: --- d. any delivery or deposition to the nasal passage or nasal cavities other than as expressly permitted in Sections 1.31(a-b) above; and e. except as provided in Section 1.31(b) above, delivery to the mouth and/or throat when not done simultaneously with delivery to the lungs and/or trachea in accordance with Section 1.31(c) above. - -------------------------------------------------------------------------------- November 19, 1999 ViroPharms-BPTD Agreement Page 6 1.32 "Pulmonary Surfactant" means a. More than ********** total, per dose, of one or more of the following **********; **********, and/or b. Any amount of ********** or ********** or any derivative thereof (a fragment or modified form of ********** or ********** or such fragment) or any molecule specifically developed and intentionally used to replace ********** or ********** in whole, or in part, and/or c. Any amount of ********** or any derivative thereof (a fragment or modified form of ********** or such fragment) plus (i) ********** conforming to a) above and/or (ii) any molecule conforming to b) above. 1.33 "Recovery Cost" means the actual costs inclusive of all direct and reasonable indirect costs of products or services incurred after the Effective Date, with no mark-up for profits, and in the case of products or services provided by a Third Party, the actual amount charged by such Third Party, but in no event shall Recovery Costs include Third Party Payments. Notwithstanding anything in this Agreement to the contrary, all services and/or property provided by any Battelle Memorial Institute operating unit, division, or affiliate other than BPTD shall be sold or billed to ViroPharma or any other party under this Agreement at ordinary and customary prices and/or rates, including profits (but not for BPTD). 1.34 "Reduced Royalty Rate Period" for the Drug Inhalation System in a country means the period beginning on the expiration of the Full Royalty Rate Period for the Drug Inhalation System in that country, or if there is no Full Royalty Rate Period in that country, then beginning on the First Commercial Sale of the Drug Inhalation System in that country, and ending on the ********** anniversary of the Effective Date. 1.35 "Regulatory Approval" 1.36 "Regulatory Authority" { shall mean any national (e.g., the United States Food and Drug Administration), supra-national (e.g., the European Commission, the Council of the European Union, or the European Agency for the Evaluation of Medicinal Products), regional, state or local regulatory agency, department, bureau, commission, council or other governmental entity in each country of the - -------------------------------------------------------------------------------- November 19, 1999 ViroPharms-BPTD Agreement Page 7 world involved in the granting of Regulatory Approval for the Drug Inhalation System. 1.37 "Retained Rights" means the right of the Third Party identified in Exhibit B to this Agreement to have granted to it upon request a paid-up, non-exclusive license to make, keep, use and sell subject matter disclosed and claimed in those of the BPTD Patents designated with an asterisk in Exhibit A to this Agreement. 1.38 "Small Molecule" means any chemical entity or compound, but not small peptides or proteins. 1.39 "Specifications" means the System Specifications and the Device Specifications. 1.40 "System Specifications" means the analytical, design and performance specifications for the Drug Inhalation System, prepared and modified in accordance with Section 3.2.2, and incorporated into this Agreement by reference. 1.41 "Third Party" means any entity or individual other than BPTD, ViroPharma, or Affiliates of either. 1.42 "Third Party Payment" means any payment made by BPTD or a BPTD Affiliate: a. to any Third Party as a result of BPTD's obtaining or licensing, before or after the Effective Date, such Third Party's Patents or technology; or b. to any Third Party as a result of any defense or settlement of any Third Party claim or action alleging that the manufacture, use, sale, offer for sale, importation or exportation of the EHD Device, the Drug Vehicle or the Drug Container infringes a Third Party Patent in any country of the world. 1.43 "ViroPhaema Invention" means any Invention that is not a BPTD Invention, including, without limitation, any Invention that covers the Drug, or the Formulated Drug, or any method of making or using the Drug or Formulated Drug in the Field, which Invention is made during the Term of this Agreement. 1.44 "ViroPharma Patent" means any Patent owned or Controlled by ViroPharma or a ViroPharma Affiliate during the term of the Agreement that claims an Invention in the Field or that generically or specifically claims or covers the manufacture, use, sale, or offer for sale, import or export of the Drug or Formulated Drug. 1.45 "ViroPharma Technology" means all ViroPharma Patents and ViroPharma Inventions, and all copyright, trademarks, and Information that ViroPharma or an Affiliate owns or Controls during the term of the Agreement. - -------------------------------------------------------------------------------- November 19, 1999 ViroPharms-BPTD Agreement Page 8 2. LICENSES 2.1 License to ViroPharma. 2.1.1 General. Except as limited by the Retained Rights, BPTD grants to ViroPharma and its Affiliates the worldwide, royalty- bearing, exclusive, except as to BPTD and its Affiliates, sublicensable right and license to use the BPTD Technology to the extent necessary to perform the activities under this Agreement in the Field, including, without limitation, making, using, selling, offering for sale, importing, or exporting the Drug Inhalation System or any part of the Drug Inhalation System, or licensing a Third Party to do any of the foregoing. 2.1.2 Post Expiration of Payment Obligation. After the expiration of the obligation to make payments under Sections 9.1-9.6 of this Agreement, the licenses under this Section 2.1 shall be fully- paid, perpetual, irrevocable and royalty-free. 2.2 License to BPTD. ViroPharma grants to BPTD and its Affiliates the royalty-free, non-sublicensable, non-exclusive, right and license to use the ViroPharma Technology only to the extent necessary to perform the activities under this Agreement in the Field, but for no other purposes. 2.3 Exclusive Relationship. 2.3.1 General. Except as specifically permitted by the terms of this Agreement and for the purposes of this Agreement, during the term of this Agreement, without the prior written consent of ViroPharma, neither BPTD nor any of its Affiliates shall directly or indirectly use or license a Third Party to use the BPTD Technology in the Field. 2.3.2 Drug Vehicle Use. Except as specifically permitted by the terms of this Agreement and for the purposes of this Agreement, neither BPTD nor any of its Affiliates shall directly or indirectly use the Drug Vehicle in the Field, or any BPTD Technology covering the Drug Vehicle in the Field: a. During the term of this Agreement; and b. For five years after the term of this Agreement, unless this Agreement is terminated pursuant to Section 14.2 or 14.3. 2.3.3 Drug Vehicle License. Neither BPTD nor any of its Affiliates shall directly or indirectly license a Third Party to use the Drug Vehicle in the Field, or any BPTD Technology covering the Drug Vehicle in the Field: a. During the term of this Agreement; and - -------------------------------------------------------------------------------- November 19, 1999 ViroPharms-BPTD Agreement Page 9 b. For five years after the term of this Agreement, unless this Agreement is terminated pursuant to Section 14.2 or 14.3. 2.3.4 ********** or ********** Used with Small Molecules. Without the prior written consent of ViroPharma, BPTD and its Affiliates shall not directly or indirectly use or license a Third Party to use the BPTD Technology for the Pulmonary Delivery of one or more Small Molecules in a formulation or in a combination with one or more ********** or ********** for the treatment and/or prevention of the effect on humans of RSV where any Small Molecule in such formulation or combination is active as a single agent for the treatment and/or prevention of the effect on humans of RSV. 2.4 Right of Reference. BPTD and its Affiliates grant ViroPharma, its Affiliates and designees a "Right of Reference," as that term is defined in 21 C.F.R. (S) 314.3(b), to any data developed under this Agreement or under the Master Services Agreement between the Parties dated April 12, 1999, and BPTD and/or its Affiliates shall provide a signed statement to this effect, if requested by ViroPharma, in accordance with 21 C.F.R. (S) 314.50(g)(3). 3. PRODUCT DEVELOPMENT. 3.1 General. 3.1.1 Compliance with Laws. The Parties shall perform all activities under this Agreement, including, without limitation, Development Activities, in compliance with all federal, state and local laws, regulations and ordinances, and with any applicable professional standards. Neither Party shall take legal action against the other Party for damages for a non- material breach of this Section 3.1.1. 3.1.2 Diligence. The Parties will use Diligent Efforts in performing Development Activities. 3.1.3 Terms for Performing Development Activities. All Development Activities performed by BPTD shall be performed pursuant to Section 4 of this Agreement. ViroPharma shall not be liable to BPTD for the costs of any Development Activities not performed pursuant to Section 4. 3.2 Development Planning and Development Activities. 3.2.1 Preparation of Development Plan. Within ninety days after the Effective Date, ViroPharma and BPTD will prepare a mutually agreeable - -------------------------------------------------------------------------------- November 19, 1999 ViroPharms-BPTD Agreement Page 10 Development Plan, which shall be attached to this Agreement as Exhibit C that shall identify in reasonable detail the activities necessary to: a. Design and develop an EHD Device appropriate to deliver the Formulated Drug, in accordance with Device Specifications; b. Design and develop a Drug Vehicle that is compatible with the EHD Device and the Drug; c. Design and develop a Drug Container or identify a commercially available Drug Container that can contain adequate quantities of the Formulated Drug, and that can be readily incorporated into the EHD Device, in accordance with Device Specifications for the Drug Container; and d. Develop preclinical and clinical data and complete Approval Applications necessary to obtain Regulatory Approval for the Drug Inhalation System in countries throughout the world. At least semiannually, after reviewing the results of the development efforts to that time, ViroPharma and BPTD shall mutually agree on any amendments to the Development Plan to reflect revised development and/or regulatory activities or goals. In the event of any failure to agree on the portions of the Development Plan described in Sections 3.2.1(a) through(c), BPTD shall have final decision making authority. In the event of any failure to agree on the portions of the Development Plan described in Section 3.2.1(d), ViroPharma shall have final decision making authority. 3.2.2 Drug Inhalation System Specifications. The summary System Specifications for the Drug Inhalation System setting forth the planned design, performance and features of the Drug Inhalation System are to be developed after the Effective Date and attached to this Agreement as Exhibit D (the "System Specifications"). The System Specifications may be altered by ViroPharma, only after BPTD has had a reasonable opportunity to review and comment on any proposed changes. 3.2.3 EHD Device and Drug Container. a. EHD Device and Drug Container Specifications. ViroPharma and BPTD shall collaborate to prepare summary Device Specifications for the EHD Device and Drug Container setting forth the planned design, features and performance of the EHD Device and the Drug Container consistent with the System Specifications. If the System Specifications and the Device Specifications conflict in any material regard, the System - -------------------------------------------------------------------------------- November 19, 1999 ViroPharma-BPTD Agreement Page 11 Specifications shall govern. At any time during the term of the Agreement, BPTD may suggest changes to the design of the EHD Device or the Drug Container. No such changes shall be implemented except upon the written approval of ViroPharma. b. Development Activities. The Parties shall perform Development Activities on the EHD Device and the Drug Container in compliance with the Development Plan and the Specifications. BPTD shall perform Development Activities pursuant to Article 4, as requested by ViroPharma. ViroPharma shall not employ Third Parties to perform Development Activities on the EHD Device and the Drug Container. 3.2.4 Drug Vehicle Development. The Parties shall perform Development Activities on the Drug Vehicle in compliance with the Development Plan and the Specifications. At ViroPharma's reasonable request, BPTD shall perform Development Activities pursuant to Article 4. 3.2.5 Costs. Except as expressly set out in this Agreement, ViroPharma shall pay for all Development Activities under this Agreement. 3.2.6 Master Services Agreement. As reasonably requested by ViroPharma, BPTD shall perform the activities described in the document entitled "ViroPharma Project: Preformulation and EHD Aerosol Feasibility Study of VP 14637" attached to the Master Services Agreement between the Parties dated April 12, 1999, in accordance with the terms of such Master Services Agreement. If the performance of activities under the Master Services Agreement conflicts with, or is made impractical by, this Agreement, such activities shall be performed pursuant to this Agreement. If any provisions of the Master Services Agreement are in conflict with the provisions of this Agreement, this Agreement shall control. 3.3 Clinical Testing of Inhalation System. ViroPharma or its designees shall be responsible for designing, performing and funding clinical studies necessary to obtain Regulatory Approval for the Drug Inhalation System. 3.4 Development Product Supply. ViroPharma or its designees shall supply, at its own cost, adequate amounts of Drug, Formulated Drug and placebo for the performance of Development Activities under this Section 3. BPTD shall supply, at ViroPharma's expense (to be charged to ViroPharma at BPTD's Recovery Cost), adequate numbers of Drug Inhalation System units for the performance of Development Activities under this Article 3, consistent with Article 5. - -------------------------------------------------------------------------------- November 19, 1999 ViroPharma-BPTD Agreement Page 12 3.5 Approval Applications. 3.5.1 Generally. ViroPharma, by itself, or through its Affiliates or sublicensees will use Diligent Efforts to prepare, assemble and submit in its own name and at its own expense all Approval Applications and DMFs for the Drug Inhalation System in countries of the world consistent with the Commercialization Plan. ViroPharma will own any such Approval Applications, DMFs and Regulatory Approvals. 3.5.2 Assistance by BPTD. BPTD and its Affiliates shall provide to ViroPharma for inclusion in Approval Applications or DMFs any necessary information or materials regarding the EHD Device and/or the Drug Container and shall employ Diligent Efforts to provide any reasonably necessary assistance to ViroPharma in obtaining Regulatory Approval or in submitting DMFs at ViroPharma's cost. Upon ViroPharma's reasonable request, BPTD and/or BPTD's Affiliates shall attend and participate in meetings regarding the Drug Inhalation System, including meetings with Regulatory Authorities. 3.5.3 Filings by BPTD. If the laws or regulations of any country require that BPTD, or a BPTD Affiliate rather than ViroPharma, file any part of any Approval Application, DMF or part thereof, BPTD, or such BPTD Affiliate, shall file the Approval Application, DMF or part thereof at ViroPharma's expense and shall, consistent with the laws and regulations of the country, transfer such Approval Application, DMF, Regulatory Approval, or part thereof, to ViroPharma, or hold and maintain the same on ViroPharma's behalf. 4. PERFORMANCE OF DEVELOPMENT ACTIVITIES BY BPTD. 4.1 Work Orders. BPTD shall perform Development Activities as agreed to by the Parties, consistent with the Development Plan from time to time. The specific details of each assignment in respect of the Development Activities will be separately negotiated and contracted for in writing, and shall be set forth in a work order in substantially the form attached hereto as Exhibit E each to be sequentially numbered and to be subject to all of the terms and conditions set forth in this Agreement, and incorporated into this Agreement by reference (each, a "Work Order"). 4.2 Protocols. Unless otherwise indicated on the applicable Work Order, BPTD shall prepare protocols describing the Development Activities for ViroPharma's review and approval prior to initiating such Development Activities. BPTD shall make such changes to such protocol that are reasonably requested by ViroPharma and agreed to by BPTD, such agreement not to be withheld or delayed unreasonably - ------------------------------------------------------------------------------- November 19, 1999 ViroPharma-BPTD Agreement Page 13 (as so modified, the "Protocol"). BPTD shall perform the Development Activities in accordance with the applicable Protocol. 4.3 Deliverables. BPTD shall deliver to ViroPharma the deliverables described or referred to on the applicable Work Order (each, a "Deliverable"). The Development Activities described in a particular Work Order shall be deemed to have been completed upon BPTD's completing such Development Activities in accordance with the Work Order terms and with the terms of this Agreement. 4.4 Inspection; Project Materials. Upon reasonable advance notice to BPTD, and at reasonable times during normal business hours, ViroPharma shall be permitted to send certain of its employees or designees to BPTD's facilities to consult with BPTD's employees and consultants engaged in the activities contemplated by a Work Order, to observe BPTD in the performance of its duties hereunder, and to inspect and take copies of any of the results of the Development Activities. BPTD shall make BPTD's employees and consultants and such results available to ViroPharma for such purposes. During such visits, ViroPharma shall comply with BPTD policy regarding security, as such policy shall be in force from time to time. 4.5 Reports. BPTD shall maintain accurate and complete records of all Development Activities it performs and all results of any trials, studies and other investigations conducted by or on behalf of ViroPharma hereunder. Unless otherwise indicated on the applicable Work Order, BPTD shall prepare and deliver to ViroPharma a final written Report for each Work Order, in such detail as agreed to by the Parties. BPTD shall provide ViroPharma with summary data describing the interim results of the Development Activities, and copies of all materials generated in connection with the activities contemplated by this Agreement, upon ViroPharma's request and at ViroPharma's cost, provided that ViroPharma is not then in default of its obligations under this Agreement. 4.6 Fees. Except as expressly agreed to in advance by ViroPharma: (a) in no event shall the price to ViroPharma for any Deliverable exceed the "Maximum Fee" listed opposite such Deliverable on such Work Order; (b) in no event shall the aggregate amount due for any Work Order exceed the "Total Fee" set forth on such Work Order; and (c) in no event shall Development Activities be billed at more than BPTD's Recovery Cost. The Maximum Fee and Total Fee are to be negotiated for the work orders on a case-by-case basis. Unless otherwise agreed to by ViroPharma in a Work Order, BPTD shall be solely responsible for expenses incurred by it in the performance of the Development Activities. 4.7 Invoices. BPTD shall generate invoices in accordance with the mutually agreed upon payment schedule described in the applicable Work Order (the "Payment Schedule"). All invoices that are not disputed by ViroPharma in good faith shall be payable within thirty days after ViroPharma's receipt. ViroPharma will pay interest of 1% per month on balances due for late payment. - ------------------------------------------------------------------------------- November 19, 1999 ViroPharma-BPTD Agreement Page 14 5. CLINICAL SUPPLY MANUFACTURING. 5.1 General. BPTD agrees to itself, or through its Affiliates, (a) supply ViroPharma's clinical testing requirements of the EHD Device, (b) install Packaged Drug supplied by ViroPharma to BPTD into such EHD Devices, and (c) ship labeled and packaged investigational Drug Inhalation Systems to clinical trial sites or a clinical trial distributor identified by ViroPharma. If the Drug Container is not readily commercially available, BPTD agrees to itself, or through its Affiliates, (x) supply ViroPharma's clinical testing requirements of the Drug Container, and (y) ship such Drug Container to ViroPharma or a designee. BPTD shall perform or cause to be performed all such activities in accordance with the Specifications and the terms of this Agreement and in compliance with all applicable federal, state, and local laws, regulations and ordinances, including, without limitation, cGMPs. Neither BPTD nor its Affiliates shall alter the manufacturing processes of clinical supplies under this Section 5.1 without the prior written approval of ViroPharma, not to be unreasonably withheld or delayed. 5.2 Manufacturing Facilities, Equipment and Licenses. In manufacturing clinical supplies pursuant to Section 5.1, BPTD and BPTD's Affiliates shall: 5.2.1 acquire all equipment and licenses, including, without limitation, all necessary plant equipment and facilities licenses, necessary to manufacture investigational EHD Devices and Drug Containers under this Section 5; 5.2.2 use Diligent Efforts to keep such equipment properly maintained and to reduce risks of breakdown of critical machinery; 5.2.3 obtain and maintain all necessary federal, state and local manufacturing licenses and approvals for the manufacturing facilities; 5.2.4 maintain all records that are necessary and appropriate to demonstrate compliance with cGMPs; and 5.2.5 BPTD shall ensure that the manufacturing of investigational EHD Devices, Drug Containers, or assembly of Drug Inhalation Systems under Section 5 complies with all applicable federal, state and local environmental, health and safety laws and regulations in effect at the time and place of such manufacture, and all waste, including but not limited to all hazardous waste, generated in such manufacturing shall be disposed of in accordance with all applicable federal, state and local laws and regulations. - ------------------------------------------------------------------------------- November 19, 1999 ViroPharma-BPTD Agreement Page 15 5.3 Orders. 5.3.1 Placement of an Order. ********** prior to the start of each clinical trial, ViroPharma will advise BPTD of the estimated number of Drug Inhalation System units necessary to complete such clinical trial, the estimated schedule on which the units will be needed and an order specifying the number of units needed for the first ********** of the clinical trial. ViroPharma will place orders for ********** of inventory for the Drug Inhalation System at a time, ********** in advance of the required delivery date. 5.3.2 Confirmation of an Order. Within two business days after receiving a an order under Section 5.3.1, BPTD shall provide written confirmation of its ability to fill such order as well as the address to which ViroPharma should ship Packaged Drug to be used in filling the order. If BPTD believes that it may be unable to fulfill such order, it shall notify ViroPharma by telephone and in writing immediately, but in no case later than two business days after receiving such order. 5.3.3 Conflicting Terms in Order Forms or Invoices. If any purchase order, invoice or acknowledgment form used by either ViroPharma or BPTD contains any provision additional or contrary to the provisions of this Agreement, such additional or contrary provision shall have no force or effect and the terms of this Agreement shall control. 5.4 Shipment of Packaged Drug. 5.4.1. Shipping by ViroPharma. Within two business days after ViroPharma receives written confirmation of BPTD's ability to fulfill an order pursuant to Section 5.3.2, ViroPharma shall ship a number of units of Packaged Drug equal to 102%, rounded up to the nearest whole number, of the number of units of Drug Inhalation System requested in the order FOB the address supplied by BPTD in such written confirmation. 5.4.2. Receipt and Possession by BPTD. ViroPharma shall retain title and BPTD shall be solely responsible for the risk of loss of Packaged Drug in the inventory or possession of BPTD or a BPTD Affiliate which loss is due to the negligence or intentional misconduct of BPTD or the BPTD Affiliate. ViroPharma shall be responsible for all losses of Packaged Drug not described in the preceding sentence. BPTD shall notify ViroPharma promptly upon the loss of any Packaged Drug. ViroPharma shall invoice BPTD for the cost of any lost Packaged Drug, for which BPTD is liable under this Section 5.4.2., which amount BPTD shall pay within thirty days of its receipt of such invoice. - ------------------------------------------------------------------------------- November 19, 1999 ViroPharma-BPTD Agreement Page 16 5.5 Completion and Packaging. BPTD will combine the Packaged Drug and the EHD Device, package and label the Drug Inhalation System for use in the clinical research program in accordance with the Specifications. 5.6 Inspection of Final Products. 5.6.1 Inspection. BPTD shall inspect finished Drug Inhalation System units pursuant to the applicable Specifications, all federal, state, and local laws and regulations, and in accordance with reasonable industry standards. ViroPharma shall have the right, at its own cost, to witness or participate in any and all inspections of finished Drug Inhalation System units at the site where such inspection takes place. 5.6.2 Documentation. Within three business days after completing the inspection of finished Drug Inhalation System units, BPTD shall forward to ViroPharma: a. a production report identifying any problems encountered in the fulfillment of the applicable Binding Order, the results of the QC analysis, and the results of any inspection, along with any supporting data, and b. a Certificate of Analysis and Conformance ("COA") specifying that all Drug Inhalation System units subject to such COA conform with the Specifications. The COAs will use lot numbers as directed by ViroPharma. ViroPharma shall be under no obligation to accept any shipment of BPTD products without an accompanying COA. 5.7 Shipment of Final Products. BPTD, or its Affiliates shall ship the units of Drug Inhalation Systems in fulfillment of an order FOB the address specified in such order for delivery by the Delivery Date. 5.8 Invoices. BPTD will invoice ViroPharma for the Recovery Cost of investigational EHD Devices and Drug Containers upon delivery of the Drug Inhalation Systems to the carrier identified by ViroPharma. Such invoices shall reasonably itemize BPTD's Recovery Costs for labor, materials, supplies, and payments to Third Parties or Affiliates, by production lot number for the Drug Inhalation System, and shall contain such other information as may be reasonably requested by ViroPharma. 5.9 Payments. ViroPharma shall pay any invoice under Section 5.8 within thirty days of receiving such invoice. - ------------------------------------------------------------------------------- November 19, 1999 ViroPharma-BPTD Agreement Page 17 6. MANUFACTURING OF COMMERCIAL SUPPLY. 6.1 General. ViroPharma or its designees shall be solely responsible for contracting for and paying the costs of any commercial supply of the Drug Inhalation System. ViroPharma may, but is not required to, contract with BPTD to provide any part of such commercial supply. 6.2 Volume Discounts for EHD Device Component Supply. BPTD shall disclose to ViroPharma the identity of the supplier for each component of the EHD Device or the Drug Container purchased from a Third Party for which BPTD is eligible to receive a volume discount, and will exert reasonable commercial efforts to cause any such supplier to provide similar discounts to ViroPharma. 6.3 Consulting and Technology Transfer. If ViroPharma contracts with a Third Party to manufacture commercial supplies of the EHD Device, Drug Container, and/or Drug Vehicle (the "Third Party Manufacturer"), then BPTD shall, at its Recovery Cost for such services: 6.3.1 assist ViroPharma in transferring to the Third Party Manufacturer all BPTD Technology existing at the time of transfer which is necessary in the manufacture of the EHD Device, Drug Container, and/or Drug Vehicle to Specifications and in compliance with all applicable federal, state, and local laws and regulations, except that the first such transfer shall be at BPTD's expense; 6.3.2 assist ViroPharma and the Third Party Manufacturer in troubleshooting any problems that may arise in manufacturing the EHD Device, Drug Container, and/or Drug Vehicle; 6.3.3 consult with ViroPharma and its Third Party Manufacturer on all aspects of manufacturing of the EHD Device, Drug Container, and/or Drug Vehicle, and any improvements that can be made to the manufacturing process; and 6.3.4 perform any other consulting, advisory, technology transfer, problem-solving or other activities reasonably necessary to assist ViroPharma and its Third Party Manufacturer to successfully manufacture the EHD Device, Drug Container, and/or Drug Vehicle. 7. COMMERCIALIZATION AND MARKETING. 7.1 Commercialization Plan. Ninety days before it submits the first Approval Application for the Drug Inhalation System to any Regulatory Authority, ViroPharma shall provide to BPTD a copy of its Commercialization Plan. The Commercialization Plan shall set out the countries in which ViroPharma intends - ------------------------------------------------------------------------------- November 19, 1999 ViroPharma-BPTD Agreement Page 18 to seek Regulatory Approval for and launch the Drug Inhalation System in the next five years. ViroPharma shall update the Commercialization Plan at least annually and shall provide BPTD with a copy of all updated Commercialization Plans. 7.2 Diligence. Within ********** of receiving the first Regulatory Approval for the Drug Inhalation System, ViroPharma shall obtain Regulatory Approval of the Drug Inhalation System in ********** of the Major Market countries. 7.2.1 If ViroPharma's failure to obtain such Regulatory Approvals is not due to reasonably unforeseeable adverse regulatory actions, or refusal or delay of Regulatory Approval because of a Regulatory Authority's concerns with the EHD Device, the Drug Container, or the Drug Vehicle, the license grant to ViroPharma under this Agreement becomes non-exclusive for all countries in which ViroPharma has not already obtained Regulatory Approval or in which approval is not pending. 7.2.2 If ViroPharma's failure to obtain such Regulatory Approvals is due to reasonably unforeseeable adverse regulatory actions, then the period for obtaining such Regulatory Approvals shall be extended by a reasonable period of time, mutually agreed to by the Parties. 7.2.3 If ViroPharma's failure to obtain such Regulatory Approvals is due to refusal or delay of Regulatory Approval because of a Regulatory Authority's concerns with the EHD Device, the Drug Container, or the Drug Vehicle, then the period for obtaining such Regulatory Approvals shall be extended for as long as necessary to resolve such Regulatory Authority's concerns with the EHD Device, the Drug Container, or the Drug Vehicle. 7.3 Further Diligence. ViroPharma shall exercise Diligent Efforts to obtain Regulatory Approval in countries consistent with the Commercialization Plan. 7.3.1 Countries Declined by ViroPharma. If ViroPharma has not received Regulatory Approval for the Drug Inhalation System in a country, and ViroPharma has confirmed to BPTD in writing that it does not intend to seek Regulatory Approval for the Drug Inhalation System in such country, and if no gray market or price effects exist as set forth in Section 7.3.3, then upon ninety days prior written notice, BPTD may grant a non-exclusive license to a Third Party to use the BPTD Technology, in the Field, in such country. 7.3.2 Countries Requested by BPTD. If ********** after the first Regulatory Approval, ViroPharma has not submitted an Approval Application for the Drug Inhalation System in a country, and if BPTD has received a request from a Third Party to License the BPTD Technology in the Field in such - ------------------------------------------------------------------------------- November 19, 1999 ViroPharma-BPTD Agreement Page 19 country, then BPTD may request from ViroPharma, in writing, the right to make such license. a. If within ninety days of such request, ViroPharma does not respond in writing stating that ViroPharma will submit an Approval Application for the Drug Inhalation System in such country or that gray market or price effects exist as set forth in Section 7.3.3, then BPTD may license a Third Party to use the BPTD Technology, in the Field, in such country. b. If ViroPharma responds in writing stating that it will submit an Approval Application for the Drug Inhalation System in such country, then ViroPharma shall have a reasonable period of time, mutually agreed to by the Parties, but in no event less than **********, to obtain Regulatory Approval in such country, and ViroPharma will use Diligent Efforts to obtain such Regulatory Approval. The Parties shall agree to extend the time for obtaining Regulatory Approval in the event of reasonably unforeseeable adverse regulatory actions, or in the event of a refusal or delay of Regulatory Approval because of a Regulatory Authority's concerns with the EHD Device, the Drug Container, or the Drug Vehicle. If ViroPharma fails to obtain Regulatory Approval in such country in the period agreed to by the Parties, then upon ninety days prior written notice, BPTD may grant a non-exclusive license to a Third Party to use the BPTD Technology, in the Field, in such country, unless the failure is due to the Regulatory Authority's concerns with the EHD Device, the Drug Container, or the Drug Vehicle. 7.3.3 Gray Market and Price Effects. Gray market or price effects shall be deemed to exist if it is reasonably expected that the licensing of the BPTD Technology in the Field to a Third Party in a country would either: a. Reduce ********** of the Drug Inhalation System ********** by ********** or more; or b. Reduce ********** of the Drug Inhalation System by ********** or more. In the event of a failure of the Parties to agree on the existence of gray market or price effects under this Section 7.3.3, the Parties shall resolve the matter in accordance with Section 15.15. 7.4 Marketing Diligence. During the term of this Agreement, ViroPharma shall use Diligent Efforts to promote the use and sale of the Drug Inhalation System in each country in which the Drug Inhalation System has received Regulatory Approval, - ------------------------------------------------------------------------------- November 19, 1999 ViroPharma-BPTD Agreement Page 20 and ViroPharma shall assure that an adequate sales force is maintained for the appropriate promotion of the Drug Inhalation System. 7.5 Regulatory Reporting. ViroPharma or its designee shall be responsible for filing all reports required to be filed in order to maintain any Regulatory Approvals granted for the Drug Inhalation System in the world, including, without limitation, adverse drug experience reports. BPTD and its Affiliates shall cooperate with ViroPharma in preparing and filing all such reports and, upon ViroPharma's request, provide ViroPharma with any information in BPTD's or its Affiliates' possession or Control that ViroPharma reasonably deems to be relevant to any such reports. If BPTD or a BPTD Affiliate has or receives any information regarding any adverse drug experience that may be related to the use of the Drug Inhalation System, BPTD shall provide ViroPharma with all such information in writing within forty-eight hours of BPTD's receiving such information. 7.6 Recalls. 7.6.1 Notification. BPTD shall immediately inform ViroPharma orally of all information in BPTD's possession relating to: a. any incident relating to a Drug Inhalation System unit and/or any lot of the Drug Inhalation System that is the subject of recall, market withdrawal or correction, or b. any Drug Inhalation System Units that may require, whether based on design defect, manufacturing defect, or otherwise, a recall, field alert, product withdrawal or field correction arising from any defect in such units. 7.6.2 Costs of Recall. The costs of any recall shall be borne consistent with the indemnification in Sections 13.1-2. 7.7 Failure Analysis. BPTD shall, at ViroPharma's expense, assist ViroPharma or its designees in performing all failure analysis for recalled, rejected, and out-of-System Specification Drug Inhalation System units that is required by federal, state, or local laws or regulations, or that is reasonably requested by ViroPharma. BPTD shall assist in making all reasonable changes to the Specifications to reduce failure rates in Drug Inhalation System units. 7.8 Technical Assistance. At ViroPharma's reasonable request and expense, BPTD shall provide ViroPharma with reasonable technical assistance and advice for responding to consumer queries regarding the Drug Inhalation System. 7.9 Patent Marking. ViroPharma shall assure that, consistent with the laws of the country in which it is distributed, each Drug Inhalation System unit subject in such country to a BPTD Patent shall be marked in a conspicuous location with a ________________________________________________________________________________ November 19, 1999 ViroPharma-BPTD Agreement Page 21 patent notice adequate to meet the patent notification requirements of that country. 8. GENERAL REGULATORY MATTERS. 8.1 Inspections. If BPTD or a BPTD Affiliate is inspected by a Regulatory Authority regarding activities under this Agreement, BPTD or the Affiliate shall promptly notify ViroPharma. BPTD or the inspected party shall provide ViroPharma with a written report of any such inspection, noting with specificity any record or document reviewed by the regulatory inspector. When a copy of a document or record is supplied to the inspector on request, that fact will be noted in the report. BPTD or the BPTD Affiliate shall keep copies of each of these records or documents in a separate inspection file and, on ViroPharma's request, will provide ViroPharma with copies of any or all of these Study Records or documents. 8.2 Regulatory Correspondence. BPTD shall provide ViroPharma with a copy of all correspondence between BPTD or any Affiliate and a Regulatory Authority pertaining to the manufacturing of investigational EHD Devices, Drug Containers, or assembly of Drug Inhalation Systems under Section 5, including, without limitation, any Form 483s, or similar notices or observations. BPTD shall provide ViroPharma with a copy of any proposed response or correspondence to a Regulatory Authority that relates directly or indirectly to the manufacturing of investigational EHD Devices, Drug Containers, or assembly of Drug Inhalation Systems under Section 5 for ViroPharma's approval at least five business days before the submission of such response or correspondence. 8.3 Audits. At reasonable times and at reasonable intervals, ViroPharma or a designee may inspect and audit BPTD's, or a BPTD Affiliate's manufacturing of investigational EHD Devices, Drug Containers, or assembly of Drug Inhalation Systems under Section 5. BPTD, or the BPTD Affiliate shall make all documents and records available for review and copying. BPTD or the BPTD Affiliate shall adopt reasonable suggestions of ViroPharma or a designee to correct any deficiencies identified in any site visit or audit. 9. LICENSE FEES AND ROYALTIES. 9.1 Milestone License Fees. In partial consideration for the licenses granted to ViroPharma under this Agreement, ViroPharma shall pay BPTD the following amounts in U.S. Dollars within the specified time period after the occurrence of the specified events: ********** _______________________________________________________________________________ November 19, 1999 ViroPharma-BPTD Agreement Page 22 9.2 Royalty Payments on ViroPharma Sales During Full Royalty Rate Period. During the Full Royalty Rate Period, in partial consideration for the licenses granted to ViroPharma under this Agreement, ViroPharma shall pay BPTD the following amounts: 9.2.1 Marginal Rates. For each calendar year, or portion thereof, in the Full Royalty Rate Period during which ViroPharma or any of its Affiliates sells the Drug Inhalation System, ViroPharma shall pay BPTD a royalty on the combined Net Sales made by ViroPharma and its Affiliate of such Drug Inhalation System units **********: ********** 9.2.2 Minimum Payments. In no event shall the payment under Section 9.2.1 for the second or any subsequent full calendar year during which ViroPharma or an Affiliate sells the Drug Inhalation System be less than **********. 9.3 Royalty Payments on ViroPharma Sales During Reduced Royalty Period. During the Reduced Royalty Rate Period, in partial consideration for the know-how and trade secret licenses granted to ViroPharma under this Agreement, ViroPharma shall pay BPTD, for each calendar year, or portion thereof during which ViroPharma sells the Drug Inhalation System, a royalty equal to ********** of the Net Sales made by ViroPharma and its Affiliates of the Drug Inhalation System units. 9.4 Royalty Payments on Sublicensed Sales Outside the U.S. 9.4.1 In partial consideration for the licenses granted to ViroPharma under this Agreement, for each calendar year, or portion thereof during which a Third Party sublicensee of ViroPharma or its Affiliates sells the Drug Inhalation System outside the U.S. during the Full Royalty Rate Period, ViroPharma shall pay BPTD an amount equal to **********, and during the Reduced Royalty Rate Period, ViroPharma shall pay BPTD an amount equal to ********** of ********** during each calendar year or portion thereof for such Third Party sublicensee's sales of, and/or right to sell Drug Inhalation System units outside the U.S., including **********, but excluding **********. 9.4.2 In partial consideration for the licenses granted to ViroPharma under this Agreement, for each calendar year, or portion thereof during which ViroPharma or its Affiliates sells the Drug Inhalation System to a sublicensee for intended sale outside the U.S. during the Full Royalty Rate Period, ViroPharma shall pay BPTD an amount equal to ********** of _______________________________________________________________________________ November 19, 1999 ViroPharma-BPTD Agreement Page 23 Net Sales to such sublicensee, and ********** of Net Sales to such sublicensee during the Reduced Royalty Rate Period. 9.5 Royalty Payments on Sublicensed Sales in the U.S. For purposes of Sections 9.2-9.3, any sale in the U.S. of the Drug Inhalation System by a Third Party sublicensee of ViroPharma shall be deemed a sale by ViroPharma. 9.6 Reduction in Royalty Payments for Infringing Competition. If infringing Competition, as defined below in this Section 9.6, exists during a given calendar quarter during the Full Royalty Rate Period for the Drug Inhalation System in a country, the royalty rates used to calculate the royalties payable to BPTD for sales of the Drug Inhalation System in such country during such calendar quarter will be reduced to **********, retroactive to the first date that infringement is determined to exist by agreement of the Parties, or pursuant to Section 15.15. Infringing Competition shall be deemed to exist if, during the applicable calendar quarter, each of the following is true: 9.6.1 one or more Third Parties is selling a pharmaceutical product for electohydrodynamic inhalation delivery for use in the Field that infringes a BPTD patent. If the parties disagree as to whether or not such an infringement exists, the matter shall be resolved in accordance with the terms of Section 15.15; 9.6.2 BPTD has not filed suit against such Third Parties for infringement of a BPTD Patent, and BPTD has not obtained a discontinuance of such infringement by such Third Parties; and 9.6.3 the sales of such competing products (measured on a unit basis) accounts for ********** or more of the combined market for the Drug Inhalation System and such competing products in such country. 9.7 Sales Reports. Within forty-five days of the end of each calendar quarter after the first commercial sale of the Drug Inhalation System in any country, ViroPharma will provide BPTD with a report listing the Net Sales of Drug Inhalation System units by country, to the extent available; identifying whether such sales were made by ViroPharma and/or an Affiliate, or by a Third Party sublicensee of ViroPharma and/or an Affiliate and calculating the royalty due on such Net Sales pursuant to this Section 9. 9.8 Payments. 9.8.1 Timing. The payment obligations under Sections 9.2-9.6 shall accrue upon the sale of the Drug Inhalation System to a Third Party purchaser, other than a Third Party Sublicensee of ViroPharma and/or an Affiliate, by ViroPharma, its Affiliates or sublicensees. Such a sale shall be deemed to occur on the date of the invoice for such sale. Payment obligations under ________________________________________________________________________________ November 19, 1999 ViroPharma-BPTD Agreement Page 24 Sections 9.2-9.6 that accrue during a calendar quarter shall be payable within forty-five days after the end of such calendar quarter. 9.8.2 Currency. All amounts due under this Agreement shall be payable in the United States in U.S. Dollars. Net Sales in a particular country outside the United States shall be converted from the currency of the sale into U.S. Dollars at the average daily rates of exchange for the four week period immediately preceding the last week in such calendar quarter as reported in the Wall Street Journal or some other source agreeable to both Parties. 9.9 Records; Audits. 9.9.1 Record Keeping. ViroPharma shall keep, and shall require its Affiliates and sublicensees to keep complete and accurate records of all Net Sales, and ViroPharma shall obtain and keep copies of such records sent by its Affiliates and sublicensees. BPTD shall keep, and shall require its Affiliates to keep complete and accurate records of all costs of the manufacturing of investigational EHD Devices, Drug Containers or assembly of Drug Inhalation Systems under Section 5, and BPTD shall obtain and keep copies of such records sent by its Affiliates. 9.9.2 Audits. Upon thirty days prior written notice from a Party (the "Auditing Party"), the other Party (the "Audited Party") shall permit an independent certified public accounting firm of nationally recognized standing selected by the Auditing Party and reasonably acceptable to the Audited Party, to examine, at the Auditing Party's sole expense, the relevant books and records of the Audited Party and its Affiliates as may be reasonably necessary to verify the accuracy of the calculation of sales and royalties under Sections 9.2-9.6, and Recovery Costs of the manufacture of investigational EHD Devices, Drug Containers or assembly of Drug Inhalation Systems under Section 5. An examination by a Party under this Section 9.9.2 shall occur not more than once in any calendar year and shall be limited to the pertinent books and records for any calendar year ending not more than thirty-six months before the date of the request. The accounting firm shall be provided access to such books and records at the Audited Party's facility(ies) where such books and records are normally kept and such examination shall be conducted during the Audited Party's normal business hours. The Audited Party may require the accounting firm to sign a standard non-disclosure agreement before providing the accounting firm access to the Audited Party's facilities or records. Upon completion of the audit, the accounting firm shall provide both Parties with a written report disclosing whether the reports submitted by the Audited Party are correct or incorrect, whether the royalties under Sections 9.2-9.6, and Recovery Costs of the manufacture of investigational EHD Devices, Drug Containers, or assembly of Drug Inhalation Systems under Section 5, are correct or incorrect, and, in each case, the specific details ________________________________________________________________________________ November 19, 1999 ViroPharma-BPTD Agreement Page 25 concerning any discrepancies. No other information shall be provided to the Auditing Party. 9.9.3 Underpayments/Overpayments. If the results of the audit under Section 9.9.2 show that additional royalties were due to BPTD, ViroPharma shall pay BPTD the additional royalties together with interest at 1% per month (or the maximum amount allowed by law, if less) from the day such amounts were first due until paid, within thirty days of the date ViroPharma receives the written audit report. If such underpayment exceeds five percent of the royalties that were to be distributed to BPTD, ViroPharma also shall reimburse BPTD for the out-of-pocket expenses incurred in conducting the audit. If the results of the audit under Section 9.9.2 show that ViroPharma overpaid BPTD for the Recovery Costs of manufacturing under Section 5, BPTD will refund such overpayments, together with interest at 1% per month (or the maximum amount allowed by law, if less) from the day such amounts were first paid by ViroPharma until reimbursed by BPTD, within thirty days of the date BPTD receives the written audit report. If such overpayment exceeds five percent of the Recovery Costs that were to be paid to BPTD, BPTD also shall reimburse ViroPharma for the out-of-pocket expenses incurred in conducting the audit. 9.9.4 Confidentiality. All financial information of a Party which is subject to review under this Section 9.9 shall be deemed to be Confidential Information subject to the provisions of Article 11, and such Confidential Information shall not be disclosed to any Third Party or used for any purpose other than verifying payments to be made by one Party to the other hereunder, provided, however, that such Confidential Information may be disclosed to Third Parties only to the extent necessary to enforce a Party's rights under this Agreement. 10. INTELLECTUAL PROPERTY. 10.1 Pre-existing Technology. ViroPharma shall remain the sole and exclusive owner of the ViroPharma Patents and all Information, copyrights, and trademarks owned or Controlled by ViroPharma at the Effective Date, subject to the rights granted hereunder. BPTD shall remain the sole and exclusive owner of the BPTD Patents and all Information, copyrights, and trademarks owned or Controlled by BPTD at the Effective Date, subject to the rights granted hereunder. 10.2 Inventions. ViroPharma shall own all ViroPharma Inventions and BPTD shall own all BPTD Inventions, whether such Inventions are made solely by either Party or jointly by the Parties. BPTD hereby irrevocably assigns and transfers to ViroPharma, and to the extent that an executory assignment is not enforceable, BPTD hereby agrees to assign and transfer to ViroPharma, in writing, from time ________________________________________________________________________________ November 19, 1999 ViroPharma-BPTD Agreement Page 26 to time, upon request, any and all right, title and interest that BPTD may have or may later acquire in the ViroPharma Inventions under copyright, patent, trade secret and trademark law, in perpetuity or for the longest period otherwise permitted by law, without the necessity of further consideration. ViroPharma hereby irrevocably assigns and transfers to BPTD, and to the extent that an executory assignment is not enforceable, ViroPharma hereby agrees to assign and transfer to BPTD, in writing, from time to time, upon request, any and all right, title and interest that ViroPharma may have or may later acquire in the BPTD Inventions under copyright, patent, trade secret and trademark law, in perpetuity or for the longest period otherwise permitted by law, without the necessity of further consideration. 10.3 Prosecution and Maintenance of Patents; Abandonment. 10.3.1 Primary Responsibility. ViroPharma shall have the sole right and responsibility to file, prosecute and maintain the ViroPharma Patents, and to file Patents on ViroPharma Inventions, and shall bear all expenses associated therewith. BPTD shall have the sole right and responsibility to file, prosecute and maintain the BPTD Patents, and to file Patents on BPTD Inventions, and shall bear all expenses associated therewith. Each Party will keep the other Party reasonably apprised of the filing, prosecution and maintenance status of the Party's respective Patents referred to in this Section 10.3.1. 10.3.2 Abandonment. BPTD shall use Diligent Efforts to initially file those BPTD Patents owned by BPTD (or foreign equivalents thereof) in the countries identified in Exhibit F to the extent such filing is permitted under the applicable patent laws. BPTD shall use Diligent Efforts to prosecute and maintain those BPTD Patents owned by BPTD (or foreign equivalents thereof) in the countries listed in Exhibit F in which it has chosen to prosecute and maintain such Patents to the extent such prosecution is permitted under the applicable patent laws. If BPTD decides to refrain from filing, or to abandon prosecution or maintenance of a particular BPTD Patent whose claims relate generically or specifically to the Drug Inhalation System in any country, ViroPharma may request that ViroPharma have the right to continue such prosecution and/or maintenance, which request BPTD will reasonably consider, provided that BPTD need not in any event grant any such request if BPTD has a strategic reason, with respect to its prosecution strategy for its Patents, for abandoning such Patent (which reason may not include simply cost savings). If BPTD grants ViroPharma's request, ViroPharma may continue the prosecution and maintenance of such BPTD Patent, at ViroPharma's expense, provided that ViroPharma keeps BPTD reasonably informed of the progress of any such prosecution. ________________________________________________________________________________ November 19, 1999 ViroPharma-BPTD Agreement Page 27 10.4 Third Party Patent Licenses. 10.4.1 Procedures. If either Party reasonably believes that the manufacture, use, sale, offering for sale, import, or export of the Drug Inhalation System may infringe a Patent owned by a Third Party, then such Party will provide the other Party all Information in its possession relating to such belief. Promptly thereafter, the Parties shall meet to discuss in good faith the appropriate steps to take to address such possible infringement, which may include, without limitation: a. negotiating and entering into a license agreement with such Third Party that grants the Parties the right to continue making, importing, using, selling and/or offering for sale the Drug Inhalation System, b. modifying the Drug Inhalation System so that the Parties believe it no longer infringes, or c. proceeding without any change based on a reasonable analysis that the Drug Inhalation System does not infringe and/or such Patent is not valid or enforceable. 10.4.2 Costs of License. If the Parties decide to obtain a license pursuant to Section 10.4.1(a), then ViroPharma shall be solely responsible for the payment of all consideration for such license if the Drug is the basis for the infringement, BPTD shall be solely responsible for the payment of all consideration for such license if the EHD Device, the Drug Vehicle, or the Drug Container is the basis for the infringement, and the Parties shall share equally the responsibility for payment of all consideration for such license if the Formulated Drug is the basis for the infringement. If the EHD Device, the Drug Vehicle, the Formulated Drug, or the Drug Container is the basis for the infringement, and if the Parties do not agree that proceeding under Section 10.4.1(c) is prudent and BPTD is unwilling or unable to make the modifications described in Section 10.4.1(b), and BPTD elects not to enter into a license agreement with such third party pursuant to Section 10.4.1(a), then ViroPharma may enter into such agreement, and all amounts paid by ViroPharma thereunder, or half of such amounts if the basis for infringement is the Formulated Drug, shall be creditable against amounts payable to BPTD under this Agreement. 10.4.3 Cost of Royalties. If the Parties agree to obtain a license pursuant to Section 10.4.1(a) for the manufacture, import, use, sale or offering for sale of the Drug Inhalation System, or if the Parties are required to pay royalties or other consideration to a Third Party to settle or otherwise resolve a Patent infringement suit alleging Patent infringement by the Drug Inhalation System: ________________________________________________________________________________ November 19, 1999 ViroPharma-BPTD Agreement Page 28 a. all royalties based on the manufacture, import, use, sale, or offer for sale of the EHD Device, the Drug Vehicle, or the Drug Container shall be paid by BPTD; b. all royalties based on the manufacture, import, use, sale, or offer for sale of the Drug shall be paid by ViroPharma; c. each Party shall pay half of all royalties based on the manufacture, import, use, sale, or offer for sale of the Formulated Drug. 10.5 Defense of Third Party Patent Claims. 10.5.1 Third Party Claims Regarding BPTD Products. ViroPharma shall promptly notify BPTD in writing of any action against ViroPharma based on alleged infringement of a Third Party's Patent by the EHD Device, the Drug Vehicle, or the Drug Container. BPTD shall defend any claim or action by a Third Party against ViroPharma and/or BPTD based on a claim that the EHD Device, the Drug Vehicle, or the Drug Container infringes a Patent that is owned or controlled by such Third Party. ViroPharma shall give BPTD control of the defense thereof (and any negotiations for settlement or compromise thereof) and will cooperate fully in the defense thereof. BPTD shall not settle or compromise any such claim or action without ViroPharma's prior written consent, if such settlement or compromise would impose on ViroPharma any obligation to pay or incur any costs or expenses. If BPTD does not undertake the defense of an action against ViroPharma hereunder within fifteen days of notice to BPTD of such claim, then ViroPharma shall have the full right to defend itself, using counsel of its own choosing, against such claim, including any negotiations for settlement or compromise thereof, and BPTD shall reimburse ViroPharma for all reasonable costs and expenses of such defense. 10.5.2 Third Party Claims Regarding ViroPharma Products. BPTD shall promptly notify ViroPharma in writing of any action against BPTD based on alleged infringement of a Third Party's Patent by the Drug or Formulated Drug. ViroPharma shall defend any claim or action by a Third Party against ViroPharma and/or BPTD based on a claim that the Drug or Formulated Drug infringes a Patent that is owned or controlled by such Third Party. BPTD shall give ViroPharma control of the defense thereof (and any negotiations for settlement or compromise thereof) and will cooperate fully in the defense thereof. ViroPharma shall not settle or compromise any such claim or action without BPTD's prior written consent, if such settlement or compromise would impose on BPTD any obligation to pay or incur any costs or expenses. If ViroPharma does not undertake the defense of an action against BPTD hereunder within fifteen ________________________________________________________________________________ November 19, 1999 ViroPharma-BPTD Agreement Page 29 days of notice to ViroPharma of such claim, then BPTD shall have the full right to defend itself, using counsel of its own choosing, against such claim, including any negotiations for settlement or compromise thereof, and ViroPharma shall reimburse BPTD for all reasonable costs and expenses of such defense. 10.6 Enforcement of Patent Rights. If any BPTD Patent or ViroPharma Patent is infringed by a Third Party in any country, the Party to this Agreement first having knowledge of such infringement shall promptly notify the other in writing. The notice shall set forth the facts of that infringement in reasonable detail. BPTD shall have the primary right, but not the obligation, to institute, prosecute, and control any action or proceeding with respect to such infringement of a BPTD Patent by counsel of its own choice and at its expense, and ViroPharma shall have the primary right, but not the obligation, to institute, prosecute, and control any action or proceeding with respect to such infringement of a ViroPharma Patent by counsel of its own choice and at its expense. 10.7 Patent Certifications. Each Party shall immediately give written notice to the other of any certification of which it becomes aware filed pursuant to 21 U.S.C. (S) 355(b)(2)(A), or (S) 355(j)(2)(A)(vii) (or any amendment or successor statute thereto) claiming that any Patent covering the Drug Inhalation System is invalid or that infringement will not arise from the manufacture, use or sale of the Drug Inhalation System by a Third Party. 10.8 Trademarks and Tradenames Generally. ViroPharma will select and own the trademarks or tradenames to be used by ViroPharma for the Drug Inhalation System. Neither Party nor its Affiliates shall adopt, use, or register any acronym, trademark, tradename, service mark or other marketing name that is the same as or confusingly similar to any acronym, trademark, tradename, service mark or other marketing name used by the other Party or its Affiliates except to the extent such adoption, use or registration was in process prior to the Effective Date. 11. EXCHANGE OF INFORMATION, CONFIDENTIALITY AND PUBLICATION. 11.1 Exchange Of Information. Promptly after the Effective Date, BPTD shall disclose and supply to ViroPharma all Information relating to the EHD Device, the Drug Vehicle, the Formulated Drug and the Drug Container, to the extent known to and legally disclosable by BPTD, that is necessary to enable ViroPharma to fully carry out all of its rights and obligations under this Agreement. Thereafter, during the term of the Agreement, BPTD shall promptly disclose and supply to ViroPharma any further Information meeting the foregoing requirements that may have become known to BPTD during such time. For clarification, the foregoing obligation shall not require BPTD to disclose proprietary Information except as reasonably required to implement the licenses granted to ViroPharma. ________________________________________________________________________________ November 19, 1999 ViroPharma-BPTD Agreement Page 30 11.2 Confidentiality. Except as otherwise provided in this Article 11, during the term of this Agreement and for a period of five years thereafter, each Party shall maintain in confidence and shall use only for purposes of this Agreement all Confidential Information disclosed by the other Party under the Agreement, except as may be otherwise provided herein. Notwithstanding the foregoing, a Party may disclose the other Party's Confidential Information to those of its Affiliates, Permitted Sublicensees (as defined in Section 11.3), directors, officers, employees, agents, consultants and clinical investigators that have a need to know such Information in order to achieve the purposes of this Agreement, provided that such Party obtains prior agreement from such disclosees to hold in confidence and not make use of such Confidential Information for any purpose other than those permitted by this Agreement. Each Party will promptly notify the other upon discovery of any unauthorized use or disclosure of the Confidential Information. Any breech of this obligation of Confidentiality by an Affiliate, Permitted Sublicensee, director, officer, employee, agent, consultant or clinical investigator of a Party shall be deemed a breech by that Party. 11.3 Authorized Disclosure. Each Party may disclose Confidential Information of the other Party to Third Parties solely to the extent such disclosure is reasonably necessary in filing or prosecuting patent applications, prosecuting or defending litigation, applying for and obtaining Regulatory Approvals or complying with applicable laws, governmental regulations or court orders, provided that such Party will give reasonable advance notice to the other Party of such disclosure requirement and shall give the other Party sufficient opportunity to object to such disclosure or to secure confidential treatment of such Confidential Information required to be disclosed to the extent that such is available. Either Party may disclose (subject to the confidentiality restrictions contained herein) Confidential Information to Third Parties to the extent necessary to perform its obligations or exercise its rights under this Agreement, provided such Third Parties execute confidentiality agreements containing terms no less strict than those contained herein (a "Permitted Sublicensee"). Further, nothing in this Article 11 shall be construed as preventing or in any way inhibiting either Party from complying with statutory and regulatory requirements governing the development, manufacture, use and sale or other distribution of the Drug Inhalation System in any manner consistent with the terms of this Agreement, provided that any such compliance that requires disclosing to regulatory authorities confidential or other information received from the other Party may be made only if such Party provides reasonable advance notice of such disclosure to the other Party and makes reasonable efforts to obtain confidential treatment of such confidential information if requested by the other Party to the extent that such is available. 11.4 Publication. BPTD shall not submit for written or oral publication any manuscript, abstract or the like which includes data or other information relating directly or indirectly to the Drug Inhalation System or any part of it without first obtaining the prior written consent of ViroPharma, which consent shall not be - -------------------------------------------------------------------------------- November 19, 1999 ViroPharma-BPTD Agreement Page 31 unreasonably withheld. ViroPharma shall not submit for written or oral publication any manuscript, abstract or the like which includes data or other information relating directly or indirectly to the EHD Device, Vehicle or Drug Container without first obtaining the prior written consent of BPTD, which consent shall not be unreasonably withheld. The Parties agree to review and comment within thirty working days on any such draft publication. Each Party shall use its Diligent Efforts to bind the clinical investigators and other agents it utilizes for the Development of the Drug Inhalation System to a provision similar to this Section, provided that it is understood that a Party's inability to bind a clinical investigator to such a similar provision shall not prohibit such party from utilizing such clinical investigator. The contribution of each Party shall be noted in all publications or presentations by acknowledgment or coauthorship, whichever is appropriate. 11.5 Confidentiality Issues In Bankruptcy. In the event that a court or other legal or administrative tribunal, directly or through an appointed master, trustee or receiver, assumes partial or complete control over the assets of a Party to this Agreement based on the insolvency or bankruptcy of such Party, the bankrupt or insolvent Party shall promptly notify the court or other tribunal: (a) that Confidential Information received from the other Party under this Agreement remains the property of the other Party and (b) of the confidentiality obligations under this Agreement with respect to such information. In addition, the bankrupt or insolvent Party shall, to the extent permitted by law, take all steps necessary or desirable to maintain the confidentiality of the other Party's Confidential Information and to seek to ensure that the court, other tribunal or appointee maintains such information in confidence in accordance with the terms of this Agreement. 12. REPRESENTATIONS & WARRANTIES. 12.1 Representations and Warranties of the Parties. Each of ViroPharma and BPTD represents and warrants to the other that: 12.1.1 It is duly organized and validly existing and in good standing under the laws of its organization or formation, and has full corporate power and authority to enter into this Agreement and to carry out the provisions hereof. 12.1.2 It is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder. 12.1.3 This Agreement is a legal and valid obligation binding upon it and enforceable in accordance with its terms, except to the extent limited by applicable bankruptcy and creditor's rights laws. The execution, delivery and performance of this Agreement by it does not conflict with any - -------------------------------------------------------------------------------- November 19, 1999 ViroPharma-BPTD Agreement Page 32 agreement, instrument or understanding, oral or written, to which it is a party or by which it may be bound, nor violate any material law or regulation of any court, governmental body or administrative or other agency having jurisdiction over it. 12.1.4 It has obtained all necessary consents, approvals and authorizations of all governmental authorities and other entities and persons required to be obtained by it in connection with entry into this Agreement. 12.1.5 No agreement between it and a Third Party in existence as of the Effective Date would prevent it from performing its obligations under this Agreement or granting to the other Party the rights granted hereunder, and it shall not enter into any such Third Party agreement that would prevent it from performing its obligations under this Agreement or granting to the other Party the rights granted hereunder. 12.2 Additional Representation and Warranties of BPTD. BPTD represents and warrants to ViroPharma that: 12.2.1 To the best of BPTD's knowledge, as of the Effective Date, the manufacture, use or sale of the EHD Device, the Drug Vehicle, or the Drug Container will not violate the intellectual property rights of any Third Party, and BPTD has no present knowledge from which it reasonably can be inferred that any BPTD Patent is invalid. 12.2.2 BPTD has no present knowledge of the existence of any pre- clinical or clinical data or information concerning the EHD Device, the Drug Vehicle, or the Drug Container that BPTD has not provided to ViroPharma that suggests that there may exist quality, toxicity, safety and/or efficacy concerns that may materially impair the utility and/or safety of the EHD Device, the Drug Vehicle, or the Drug Container in the Field; 12.2.3 BPTD shall use Diligent Efforts in performing all Development Activities; 12.2.4 at the time of delivery of any unit of the investigational Drug Inhalation System, any part of such unit that BPTD or a BPTD Affiliate manufactured shall conform in all material respects to the Specifications, and federal, state and local laws and regulations, and shall be free from material defects in materials and workmanship; 12.2.5 the term "condition" as used in Section 1.31(a)(iii), includes but is not limited to infancy and elderly; 12.2.6 BPTD has the full right, power, and authority to grant ViroPharma all the right, title, and interest in the license described in Section 2.1.1 for each - -------------------------------------------------------------------------------- November 19, 1999 ViroPharma-BPTD Agreement Page 33 BPTD Patent included in Exhibit A as such Exhibit A exists on the Effective Date; and 12.2.7 only those BPTD Patents designated with an asterisk in Exhibit A as such Exhibit A exists on the Effective Date are subject to the Retained Rights. 12.3 DISCLAIMER. EXCEPT FOR THE EXPRESS WARRANTIES AND REPRESENTATIONS CONTAINED IN THIS AGREEMENT, NEITHER VIROPHARMA NOR BPTD MAKES, AND EACH HEREBY EXPRESSLY DISCLAIMS, ANY WARRANTIES OR REPRESENTATIONS, EITHER EXPRESS OR IMPLIED, WHETHER IN FACT OR IN LAW, INCLUDING WITHOUT LIMITATION IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT. 12.4 Certain Additional Covenants. 12.4.1 BPTD shall pay all royalties or other sums that BPTD may owe to any Third Party by virtue of its activities under this Agreement, and shall perform and observe all of the other material obligations under all present and future agreements between BPTD and any Third Party that are in any way related to BPTD's ability to grant the rights BPTD has granted to ViroPharma under this Agreement or to BPTD's ability to perform its obligations to ViroPharma under this Agreement. If BPTD receives notice from any such Third Party that BPTD has committed a breach of its obligations under any such agreement, or if BPTD anticipates such breach, which breach may give rise to a right by such Third Party to terminate or materially diminish BPTD's rights to Patents and/or Information in the Field licensed to BPTD, which Patents and/or Information are sublicensed to ViroPharma hereunder, or otherwise to diminish materially BPTD's ability to perform its obligations to ViroPharma under this Agreement, BPTD shall immediately notify ViroPharma of such situation, and BPTD shall promptly cure such breach. However, if BPTD is unable to cure such breach, BPTD shall, to the extent possible, permit ViroPharma to cure such breach on BPTD's behalf. 12.4.2 BPTD agrees that, without the prior written approval of ViroPharma, BPTD and its Affiliates shall not knowingly conduct any development work, either themselves or in conjunction with any other licensees or partners, on the EHD Device, the Drug Vehicle, the Formulated Drug, the Drug, or the Drug Container for use in the Field; provided that the foregoing shall not be interpreted to prevent BPTD or its Affiliates or other licensees from developing other BPTD pulmonary drug delivery products for use outside the Field. - -------------------------------------------------------------------------------- November 19, 1999 ViroPharma-BPTD Agreement Page 34 12.5 Representation by Legal Counsel. Each Party hereto represents that it has been represented by legal counsel in connection with this Agreement and acknowledges that it has participated in the drafting hereof. In interpreting and applying the terms and provisions of this Agreement, the Parties agree that no presumption shall exist or be implied against the Party that drafted such terms and provisions. 13. INDEMNIFICATION. 13.1 Indemnification by BPTD. BPTD shall indemnify, defend and hold ViroPharma, its directors, employees, agents and representatives (including but not limited to ViroPharma's Affiliates and sublicensees) harmless from and against all claims, causes of action, settlement costs (including but not limited to reasonable attorney's fees and expenses) losses or liabilities of any kind which (a) arise from or are attributable to any negligent act or omission or willful misconduct on the part of BPTD, its directors, employees, agents or representatives relating to any of its obligations under this Agreement, including, but not limited to any breach of a representation or warranty; or (b) arise from or are attributable to a defect in the EHD Device, the Drug Container or the Drug Vehicle or in the manufacture of the EHD Device, the Drug Container or the Drug Vehicle where such manufacture is under the control of BPTD, and which in either case are not otherwise attributable to any negligent act or omission or willful misconduct on the part of ViroPharma, its directors, employees, agents or representatives (including, but not limited to ViroPharma's Affiliates). 13.2 Indemnification by ViroPharma. ViroPharma shall indemnify, defend and hold BPTD, its directors, employees, agents and representations harmless from and against all claims, causes of actions, settlement costs (including but not limited to reasonable attorney's fees and expenses) losses or liabilities of any kind which: (a) arise from or are attributable to any negligent act or omission or willful misconduct on the part of ViroPharma, its directors, employees, agents or representatives relating to any of its obligations under this Agreement; or (b) arise from or are attributable to the labeling, distribution, use, sale, marketing and promotion of the Drug Inhalation System or manufacturing of the Drug Inhalation System or its components where such manufacturing is under the control of ViroPharma, and which in either case are not otherwise attributable to any negligent act or omission or willful misconduct on the part of BPTD, its directors, employees, agents or representatives (including, but not limited to BPTD's Affiliates). 13.3 Indemnity Procedure. If a Party seeks indemnification under Section 13.1 or 13.2, it shall inform the other Party (the "Indemnifying Party") of a claim as soon as reasonably practicable after it receives notice of the claim, shall permit the Indemnifying Party to assume direction and control of the defense of the claim (including the right to settle the claim solely for monetary consideration), and, at - -------------------------------------------------------------------------------- November 19, 1999 ViroPharma-BPTD Agreement Page 35 the Indemnifying Party's expense, shall cooperate as reasonably requested in the defense of the claim. The Indemnified Party shall have the right to retain its own counsel, subject to the approval of any such outside counsel by the Indemnifying Party, with the fees and expenses to be paid by the Indemnifying Party if representation of such Party by the counsel retained by Indemnifying Party would be inappropriate due to actual or potential differing interests between such indemnitee and any other party represented by such counsel in such proceedings. The Indemnifying Party may not settle such action or claim, or otherwise consent to an adverse judgment in such action or claim, without the express written consent of the Indemnified Party if such settlement or adverse judgment diminishes the rights or interests of the Indemnified Party. 13.4 LIMITATION OF LIABILITY. IN NO EVENT, NOT WITHSTANDING ANY PROVISION OF THIS AGREEMENT TO THE CONTRARY, SHALL EITHER PARTY, ITS DIRECTORS, TRUSTEES, OFFICERS, EMPLOYEES, AGENTS OR AFFILIATES BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES, WHETHER BASED UPON A CLAIM OR ACTION OF CONTRACT, WARRANTY, NEGLIGENCE, STRICT LIABILITY OR OTHER TORT, OR OTHERWISE, ARISING OUT OF THIS AGREEMENT. 13.5 Insurance. Each Party hereby agrees to maintain, during the term of this Agreement, insurance with reputable and sound independent insurers at commercially reasonable levels of coverage in relation to the type, scope and size of business it conducts and to all its obligations herein contained and shall give the other Party an opportunity from time to time to review the insurance policies so that the other Party may satisfy itself that such insurance policies are valid, that the premiums are being paid regularly and that the policies are kept in full force and effect. Each Party shall, upon the other Party's reasonable request from time to time, produce evidence that all insurance premiums have been paid and kept up to date and are kept in accordance with any local insurance laws or regulations from time to time in force. Each Party will, at the request of the other Party, name the other Party and its Affiliates as additional insureds as applicable on all liability insurance policies, including, but not limited to, product liability, products and clinicians, malicious product tampering and general liability policies and will obtain for the other Party an endorsement that such insurance shall not be cancelled without thirty days prior written notice to the other Party. A Party's liability to the other is in no way limited to the extent of the Party's insurance coverage. In the event of duplicate coverage, the insurance policy of the Party whose fault causes the need for reimbursement under an insurance policy shall be primary and the other Party's secondary. - -------------------------------------------------------------------------------- November 19, 1999 ViroPharma-BPTD Agreement Page 36 14. TERM OF AGREEMENT AND TERMINATION. 14.1 Term. Unless earlier terminated as provided herein, this Agreement shall expire on the expiration of the last to expire Reduced Royalty Rate Period for the Drug Inhalation System. 14.2 Termination for Material Breach. A non defaulting Party shall have the right to terminate this Agreement after written notice to the other that the other is in material breach of this Agreement (the "Defaulting Party"), unless the Defaulting Party cures the breach before the expiration of ninety days - thirty days in the case of a delayed payment - after such written notice. 14.3 Termination by ViroPharma. ViroPharma may terminate this Agreement at any time effective upon thirty (30) days written notice to BPTD and payment of any amounts due as of the date of notice of termination, including direct costs to terminate commitments and work in process authorized through open Work Orders that cannot be avoided through reasonable commercial efforts. 14.4 Termination for Bankruptcy. Either Party may terminate this Agreement if, at any time, the other Party shall file in any court or agency pursuant to any statute or regulation of any state or country, a petition in bankruptcy or insolvency or for reorganization or for an arrangement or for the appointment of a receiver or trustee of the Party or of its assets, or if the other Party proposes a written agreement of composition or extension of its debts, or if the other Party shall be served with an involuntary petition against it, filed in any insolvency proceeding, and such petition shall not be dismissed within sixty days after the filing thereof, or if the other Party shall propose or be a party to any dissolution or liquidation, or if the other Party shall make an assignment for the benefit of creditors. 14.5 Consequences of Termination. Upon the expiration or any termination of this Agreement, (i) all licenses under this Agreement shall be terminated, except as expressly provided under this Agreement, including, without limitation, Sections 14.8 and 2.1; and (ii) each Party shall destroy and shall not retain any copies of any Confidential Information provided by the other Party hereunder, except for one copy to be retained by legal counsel solely for archival purposes. Notwithstanding anything in this Agreement to the contrary, in the event of the termination or expiration of this Agreement, ViroPharma shall have a continuing right to sell under this Agreement for a period of ********** days following termination, such amount of EHD Devices or Drug Containers remaining in its inventory. 14.6 Accrued Rights, Surviving Obligations. Termination or expiration of this Agreement shall not affect any rights to payment or other rights that accrued before the date of termination or expiration. The terms of the following Articles and Sections shall survive any termination of this Agreement: 2.1.2, 2.3.2-2.3.3, 2.4, 3.5.3, 7.5-7.6, 9.9, 10.1, 10.2, 10.5, 10.7, 11, 12, 13, 14.5, 14.6, 14.8. - -------------------------------------------------------------------------------- November 19, 1999 ViroPharma-BPTD Agreement Page 37 14.7 Financial Status; Rights in Event of Financing Difficulties. BPTD and ViroPharma agree to keep each other informed as to its financial condition during the term of this Agreement. If at any time the financial resources of BPTD or ViroPharma are not reasonably sufficient to enable it to continue to meet its obligations hereunder for at least the next six months, the parties will meet to review and consider steps that might be taken to ensure that the other party will be able to perform its obligations under this Agreement. 14.8 Rights In Event of Bankruptcy. 14.8.1 Notwithstanding the bankruptcy of BPTD, or the impairment of performance by BPTD of its obligations under this Agreement as a result of bankruptcy or insolvency of BPTD, ViroPharma shall be entitled to retain the license rights and licenses granted herein, subject to ViroPharma's performance of all its obligations under the Agreement and to BPTD's rights to terminate this Agreement for reasons other than bankruptcy or insolvency as expressly provided in this Agreement. 14.8.2 All rights and licenses granted under or pursuant to this Agreement are, for all purposes of Section 365(n) of Title 11 of the United States Code ("Title 11"), licenses of rights to "intellectual property" as defined in Title 11. Each Party agrees that the other Party, as licensee of such rights under this Agreement shall retain and may fully exercise all of its rights and elections under Title 11. Each Party shall during the Term of this Agreement create and maintain current copies or, if not amenable to copying, detailed descriptions or other appropriate embodiments, to the extent feasible, of all such intellectual property. If a case is commenced by or against a Party under Title 11 (the "Affected Party"), the Affected Party (in any capacity, including debtor-in- possession) and its successors and assigns (including, without limitation, a Title 11 Trustee) shall: a. as the other Party may elect in a written request, immediately upon such request: i. perform all of the obligations provided in this Agreement to be performed by the Affected Party including, where applicable and without limitation, providing to the other Party portions of such intellectual property (including embodiments thereof) held by the Affected Party and such successors and assigns or otherwise available to them; or ii. provide to the other Party all such intellectual property (including all embodiments thereof) held by the Affected Party and such successors and assigns or otherwise available to them; and - -------------------------------------------------------------------------------- November 19, 1999 ViroPharma-BPTD Agreement Page 38 b. not interfere with the rights of the other Party under this Agreement, or any agreement supplemental hereto, to such intellectual property (including such embodiments), including any right to obtain such intellectual property (or such embodiments) from another entity. 14.8.3 If a Title 11 case is commenced by or against the Affected Party, and this Agreement is rejected as provided in Title 11, and the other Party elects to retain its rights hereunder as provided in Title 11, then the Affected Party (in any capacity, including debtor-in-possession) and its successors and assigns (including, without limitation, a Title 11 Trustee) shall provide to the other Party all such intellectual property (including all embodiments thereof) held by the Affected Party and such successors and assigns, or otherwise available to them, immediately upon the other Party's written request. Whenever the Affected Party or any of its successors or assigns provides to the other Party any of the intellectual property licensed hereunder (or any embodiment thereof) pursuant to this Section 13.8, the other Party shall have the right to perform the obligations of the Affected Party hereunder with respect to such intellectual property, but neither such provision nor such performance by the other Party shall release the Affected Party from any such obligation or liability for failing to perform it. 14.8.4 All rights, powers and remedies of the other Party provided herein are in addition to and not in substitution for any and all other rights, powers and remedies now or hereafter existing at law or in equity (including, without limitation, Title 11) in the event of the commencement of a Title 11 case by or against the Affected Party. The other Party, in addition to the rights, power and remedies expressly provided herein, shall be entitled to exercise all other such rights and powers and resort to all other such remedies as may now or hereafter exist at law or in equity (including, without limitation, Title 11) in such event. The Parties agree that they intend the foregoing rights to extend to the maximum extent permitted by law, including, without limitation, for purposes of Title 11: a. the right of access to any intellectual property (including all embodiments thereof) of the Affected Party, or any third party with whom the Affected Party contracts to perform an obligation of the Affected Party under this Agreement, and, in the case of the Third Party, which is necessary for the development, registration, manufacture and marketing of Drug Inhalation Systems; and b. the right to contract directly with any Third Party described in 14.8.4(a) to complete the contracted work. - -------------------------------------------------------------------------------- November 19, 1999 ViroPharma-BPTD Agreement Page 39 15. MISCELLANEOUS. 15.1 Press Releases; Disclosure of Agreement. No public announcement or other disclosure to Third Parties concerning the terms of this Agreement shall be made, either directly or indirectly, by either Party to this Agreement, except as may be legally required or as may be required by the terms of that certain license agreement between Battelle Memorial Institute and Electrosols, Ltd. dated March 29, 1999, and as may be required for recording purposes, without first obtaining the written approval of the other Party and agreement upon the nature and text of such announcement or disclosure. The Party desiring to make any such public announcement or other disclosure shall inform the other Party of the proposed announcement or disclosure in reasonably sufficient time prior to public release, and shall provide the other Party with a written copy thereof, in order to allow such other Party to comment upon such announcement or disclosure. Each Party agrees that it shall cooperate fully with the other with respect to all disclosures regarding this Agreement to the Securities Exchange Commission and any other governmental or regulatory agencies, including requests for confidential treatment of proprietary information of either Party included in any such disclosure. 15.2 Recordation. Subject to compliance with all confidentiality obligations of ViroPharma under this Agreement, ViroPharma shall have the right, at any time, to record or register this Agreement in appropriate governmental or regulatory offices anywhere in the world, and BPTD shall provide reasonable assistance to ViroPharma in effecting such recording or registration, provided that ViroPharma shall take appropriate measures available to protect the confidentiality of the terms of the Agreement. 15.3 Entire Agreement; Amendment. This Agreement, and the existing Confidentiality Agreements between the Parties related to the subject matter of this Agreement, sets forth the terms of the collaboration agreement between the Parties hereto and, except as otherwise set forth herein, supersedes and terminates all prior representations, agreements and understandings between the Parties regarding the subject matter hereof. Any modification of this Agreement shall be effective only when in writing and signed by the Parties, and specifically stating that it is an amendment to this Agreement. 15.4 Assignment. This Agreement and the licenses and rights herein granted shall be binding upon and inure to the benefit of the successors in interest of the respective Parties. Neither Party may assign or transfer this Agreement or any rights or obligations hereunder without the prior written consent of the other Party, which consent shall not be unreasonably withheld, except that a Party may make such an assignment without the other Party's consent to Affiliates or to a successor to all or substantially all of the related business assets of such Party relating to this Agreement, whether by way of a merger, sale of stock, sale of assets or other similar transaction. - -------------------------------------------------------------------------------- November 19, 1999 ViroPharma-BPTD Agreement Page 40 15.5 Notices. Any notice required or permitted to be given under this Agreement shall be in writing, shall specifically refer to this Agreement and shall be effective on receipt, as evidenced in writing, when given by registered airmail or overnight courier and addressed, unless otherwise specified in writing, to the addresses of the Parties described below: For BPTD: Battelle Pulmonary Therapeutics Division Attention: Dennis Cearlock 505 King Avenue Columbus, Ohio 43201-2693 FAX (614) 424-3622 With a copy to: Robert L. Zieg (same address) FAX (614) 424-3864 For ViroPharma: ViroPharma Incorporated 405 Eagleview Boulevard Exton, PA 19341 FAX: (610) 458-7380 Attention: Jeffrey Hincks, Ph.D. With a copy to: ViroPharma Incorporated 405 Eagleview Boulevard Exton, PA 19341 FAX: (610) 458-7380 Attention: General Counsel 15.6 Severability. If any Article or part thereof of this Agreement is declared invalid by any court of competent jurisdiction, or any government or other agency having jurisdiction over either BPTD or ViroPharma deems any Article or part thereof to be contrary to any anti-trust or competition laws then such declaration shall not affect the remainder of the Article or other Articles. To the extent possible the Parties shall revise such invalidated Article or part thereof in a manner that will render such provision valid without impairing the Parties' original intent. In the event a Party's rights are materially affected as a result of a change in this Agreement under this Paragraph, the Parties will renegotiate the terms and conditions of this Agreement to resolve any inequities. 15.7 Force Majeure. Except as otherwise provided herein, no Party shall be in breach of this Agreement, or liable to the other Party, for any delay or failure of performance to the extent such delay or failure is caused by circumstances beyond its reasonable control and that by the exercise of Diligent Efforts it is unable to ________________________________________________________________________________ November 19, 1999 ViroPharma-BPTD Agreement Page 41 prevent, provided that the party claiming excuse uses its Diligent Efforts to overcome the same. 15.8 Expenses. Except as otherwise provided in the Agreement, all expenses incurred by ViroPharma in connection with its obligations under this Agreement will be borne solely by ViroPharma and all expenses incurred by BPTD in connection with its obligations under this Agreement will be borne solely by BPTD. Each Party will be responsible for appointing its own employees, agents and representatives, who will be compensated by such Party. Each Party will be responsible for paying any finder's or broker's fee owed to a Third Party that such Party incurs based directly or indirectly on negotiating and entering this Agreement, and shall indemnify the other Party against any obligation to pay such fee. 15.9 Non-Waiver. The failure of a Party in any one or more instances to insist upon strict performance of any of the terms and conditions of this Agreement shall not be construed as a waiver or relinquishment, to any extent, of the right to assert or rely upon any such terms or conditions on any future occasion. 15.10 Disclaimer of Agency; Relationship of the Parties. This Agreement shall not render either Party the legal representative or agent of the other, nor shall either Party have the right or authority to assume, create, or incur any Third Party liability or obligation of any kind, express or implied, against or in the name of or on behalf of another except as expressly set forth in this Agreement. The relationship between BPTD and ViroPharma under this Agreement is that of independent contractors. BPTD and ViroPharma are not joint venturers, partners, principal and agent, master and servant, employer or employee, and have no relationship other than as independent contracting Parties. Neither Party shall have any responsibility for the hiring, firing, compensation or employee benefits of the other Party's employees. 15.11 Further Actions. Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of the Agreement. 15.12 Governing Law. This Agreement will be governed by and interpreted in accordance with the laws of the Commonwealth of Pennsylvania, without regard to the choice of law doctrines of Pennsylvania or any other jurisdiction. 15.13 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be an original and all of which shall constitute together the same document. 15.14 Debarment. Each Party certifies that none of its directors, officers, employees, consultants or agents, nor any of its Affiliates' directors, officers, employees, consultants or agents have been debarred, nor have they been engaged in any acts ________________________________________________________________________________ November 19, 1999 ViroPharma-BPTD Agreement Page 42 that could serve as the basis for debarment under the Generic Drug Enforcement Act. 15.15 Dispute Resolution. In the event the parties cannot resolve any controversy or claim arising out of or relating to this Agreement or the breach thereof, such controversy or claim shall be settled by a sole neutral through a binding, non-reviewable and non-appealable alternative dispute resolution process in accordance with the then existing Non-Administered Arbitration Rules of the CPR Institute for Dispute Resolution, 366 Madison Avenue, New York, New York 10017- 3122. The neutral's award may be entered in any court having final jurisdiction. IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement as of the date first above written. BATTELLE MEMORIAL INSTITUTE- VIROPHARMA INCORPORATED COLUMBUS OPERATIONS By: /s/ Dennis B. Cearlock By: /s/ Claude H. Nash Name: Dennis B. Cearlock Name: Claude H. Nash Its: Senior Vice President Its: President, CEO & Chairman ________________________________________________________________________________ November 19, 1999 ViroPharma-BPTD Agreement Page 43 EXHIBIT A BPTD Patents/Applications ********** ________________________________________________________________________________ November 19, 1999 ViroPharma-BPTD Agreement Page 44 EXHIBIT B The Third Party referred to in Section 1.37 of this Agreement is ********** and its successors in interest. ________________________________________________________________________________ November 19, 1999 ViroPharma-BPTD Agreement Page 45 EXHIBIT C Development Plan ________________________________________________________________________________ November 19, 1999 ViroPharma-BPTD Agreement Page 46 EXHIBIT D System Specifications ________________________________________________________________________________ November 19, 1999 ViroPharma-BPTD Agreement Page 47 EXHIBIT E Form of Work Order WORK ORDER This Work Order is entered into this ____ day of ______________, 1999 between BPTD and ViroPharma and is subject to all of the terms and conditions set forth in that certain Product Development and Commercialization Agreement dated November 19, 1999, between the BPTD and ViroPharma (the "PDC Agreement"). In the event of any conflict between the terms of this Work Order and the PDC Agreement, the terms of this Work Order shall control. 1. Description of Services. ----------------------- 2. Deliverables; Fees; Delivery Dates. ---------------------------------- Maximum Fee Description of Deliverables for Deliverable Delivery Date --------------------------- --------------- ------------- TOTAL MAXIMUM FEE 3. Payment Schedule. ---------------- ________________________________________________________________________________ November 19, 1999 ViroPharma-BPTD Agreement Page 48 The PDC Agreement shall remain in full force and effect, subject only to the express terms of this Work Order, and the parties hereto hereby ratify and confirm the provisions of the PDC Agreement, as may be so modified by this Work Order. The parties have executed this Work Order as of the latest of the dates set forth below. VIROPHARMA INCORPORATED BATTELLE MEMORIAL INSTITUTE By:_______________________________ By:________________________________ Name, Title:______________________ Name, Title:_______________________ Date:_____________________________ Date:______________________________ ________________________________________________________________________________ November 19, 1999 ViroPharma-BPTD Agreement Page 49 EXHIBIT F Countries in Which BPTD Shall File, Prosecute and Maintain BPTD Patents Pursuant to Section 10.3.2 ---------------------------------------------------- ********** ________________________________________________________________________________ November 19, 1999 ViroPharma-BPTD Agreement Page 50 EX-10.25 3 COLLABORATION AND LICENSE AGREEMENT EXHIBIT 10.25 Portions of this exhibit were omitted and filed separately with the Secretary of the Commission pursuant to an application for confidential treatment filed with the Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. Such portions are marked by a series of asterisks. COLLABORATION AND LICENSE AGREEMENT by and between AMERICAN HOME PRODUCTS CORPORATION, acting through its WYETH-AYERST LABORATORIES DIVISION and VIROPHARMA INCORPORATED December 9, 1999 TABLE OF CONTENTS
Page 1. DEFINITIONS......................................................................................................... 1 1.1 "Acquiring Entity"............................................................................................... 1 1.2 "Active Collaboration Target".................................................................................... 1 1.3 "Active Compound"................................................................................................ 2 1.4 "Affiliate(s)"................................................................................................... 2 1.5 "AHPC Chemical Library".......................................................................................... 5 1.6 "AHPC Know-How".................................................................................................. 5 1.7 "AHPC Patent Rights"............................................................................................. 5 1.8 "AHPC Technology"................................................................................................ 5 1.9 "AHPC Territory"................................................................................................. 5 1.10 "Annual Commercialization Plan and Budget"....................................................................... 5 1.11 "Annual Development Plan and Budget"............................................................................. 5 1.12 "Assay and Screening Technology"................................................................................. 6 1.13 "Assigned Sales Force Effort".................................................................................... 6 1.14 "Baseline Allocation of Net Profits"............................................................................. 6 1.15 "Biomolecule".................................................................................................... 6 1.16 "Calendar Quarter"............................................................................................... 6 1.17 "Change of Control".............................................................................................. 6 1.18 "Class A Product"................................................................................................ 6 1.19 "Class B Product"................................................................................................ 6 1.20 "Collaboration Inventions"....................................................................................... 6 1.21 "Collaboration Know-How"......................................................................................... 7 1.22 "Collaboration Patent Rights".................................................................................... 7 1.23 "Collaboration Target"........................................................................................... 7 1.24 "Collaboration Technology"....................................................................................... 7 1.25 "Commercialization".............................................................................................. 7 1.26 "Commercially Reasonable Efforts"................................................................................ 7 1.27 "Compound"....................................................................................................... 7 1.28 "Confidential Information"....................................................................................... 7 1.29 "Control" or "Controlled"........................................................................................ 7 1.30 "Copromotion Territory".......................................................................................... 8 1.31 "Copromotion Territory Commercialization Plan"................................................................... 8 1.32 "Copyright"...................................................................................................... 8 1.33 "Cost of Goods Manufactured for Sale"............................................................................ 8 1.34 "Derivative"..................................................................................................... 8 1.35 "Detail"......................................................................................................... 8 1.36 "Development".................................................................................................... 8 1.37 "Development Candidate".......................................................................................... 9 1.38 "Development Expenses"........................................................................................... 9 1.39 "Development Phase".............................................................................................. 9 1.40 "Effective Date"................................................................................................. 9 1.41 "Executive Steering Committee" or "ESC".......................................................................... 9 1.42 "Extra Effort"................................................................................................... 9 1.43 "Extra Effort Expense"........................................................................................... 9 1.44 "FDA"............................................................................................................ 9 1.45 "FD&C Act"....................................................................................................... 9 1.46 "Field".......................................................................................................... 9 1.47 "First Commercial Sale".......................................................................................... 9 1.48 "FTE"............................................................................................................ 9
________________________________________________________________________________ December 9, 1999 Collaboration Agreement Page i 1.49 "Full Royalty Rate Period"................................................................................... 10 1.50 "Fully-Absorbed Standard Cost"............................................................................... 10 1.51 "Global Development Plan".................................................................................... 10 1.52 "Good Clinical Practice" or "GCP"............................................................................ 10 1.53 "Good Laboratory Practice" or "GLP".......................................................................... 10 1.54 "HCV"........................................................................................................ 11 1.55 "Hit"........................................................................................................ 11 1.56 "Incremental Sales Force Effort"............................................................................. 11 1.57 "Incremental Sales Force Effort Expense"..................................................................... 11 1.58 "IND"........................................................................................................ 11 1.59 "Initial Term of the Screening Phase"........................................................................ 11 1.60 "Invention".................................................................................................. 11 1.61 "Joint Steering Committee" or "JSC".......................................................................... 11 1.62 "Know-How"................................................................................................... 11 1.63 "Lapse Quarter".............................................................................................. 12 1.64 "Lapse Year"................................................................................................. 12 1.65 "Lead Compound".............................................................................................. 12 1.66 "Major European Country"..................................................................................... 12 1.67 "Marketing Account".......................................................................................... 12 1.68 "Marketing Steering Committee" or "MSC"...................................................................... 12 1.69 "NDA"........................................................................................................ 12 1.70 "Net Profits"................................................................................................ 12 1.71 "Net Sales".................................................................................................. 12 1.72 "Non-Collaboration Invention"................................................................................ 13 1.73 "Patent Rights".............................................................................................. 13 1.74 "Penalty Year"............................................................................................... 14 1.75 "Phase I Clinical Study"..................................................................................... 14 1.76 "Phase II Clinical Study".................................................................................... 14 1.77 "Phase III Clinical Study"................................................................................... 14 1.78 "Post Approval Research and Regulatory Expenses"............................................................. 14 1.79 "Pre-Development Expenses"................................................................................... 14 1.80 "Pre-Marketing Expenses"..................................................................................... 14 1.81 "Pre-Marketing Expense Shortfall"............................................................................ 15 1.82 "Prior Invention"............................................................................................ 15 1.83 "Product".................................................................................................... 15 1.84 "Promotion".................................................................................................. 15 1.85 "R&D Account"................................................................................................ 15 1.86 "R&D Reimbursement Account".................................................................................. 15 1.87 "R&D Shortfall".............................................................................................. 15 1.88 "Reduced Royalty Rate Period"................................................................................ 15 1.89 "Regulatory Approval"........................................................................................ 15 1.90 "Regulatory Authority"....................................................................................... 16 1.91 "Research"................................................................................................... 16 1.92 "Research Phase"............................................................................................. 16 1.93 "Research Program"........................................................................................... 16 1.94 "Sales and Marketing Expenses"............................................................................... 16 1.95 "Sample"..................................................................................................... 17 1.96 "Sample Receipt Forms"....................................................................................... 17 1.97 "Screening".................................................................................................. 17 1.98 "Screening Phase"............................................................................................ 17 1.99 "Small Molecule"............................................................................................. 17 1.100 "Surviving Entity"........................................................................................... 17 1.101 "Tail Compound".............................................................................................. 17 1.102 "Target"..................................................................................................... 17 1.103 "Target Market".............................................................................................. 17 1.104 "Target Physician"........................................................................................... 17
________________________________________________________________________________ December 9, 1999 Collaboration Agreement Page ii 1.105 "Term of the Screening Phase".................................................................................... 17 1.106 "Third Part(y/ies)".............................................................................................. 17 1.107 "Third Party License Fee"........................................................................................ 18 1.108 "Trademark"...................................................................................................... 18 1.109 "Valid Claim".................................................................................................... 18 1.110 "ViroPharma Chemical Library".................................................................................... 18 1.111 "ViroPharma Know-How"............................................................................................ 18 1.112 "ViroPharma Patent Rights"....................................................................................... 18 1.113 "ViroPharma Technology".......................................................................................... 18 2. LICENSES............................................................................................................ 19 2.1 Licenses to AHPC................................................................................................. 19 2.2 Licenses to ViroPharma........................................................................................... 19 2.3 Sublicensing to Third Party Contractors.......................................................................... 20 2.4 Dropped Compounds................................................................................................ 20 2.5 Direct Licenses to AHPC Affiliates............................................................................... 20 2.6 Exclusive Working Relationship................................................................................... 21 2.7 Right of Reference............................................................................................... 22 3. MANAGEMENT OF COLLABORATION......................................................................................... 22 3.1 Joint Steering Committee......................................................................................... 22 3.1.1 Formation; Membership...................................................................................... 22 3.1.2 Chairperson; Secretary..................................................................................... 22 3.1.3 Meetings................................................................................................... 23 3.1.4 Decision Making............................................................................................ 23 3.1.5 Responsibilities of the JSC................................................................................ 23 3.2 Marketing Steering Committee..................................................................................... 24 3.2.1 Formation; Membership...................................................................................... 24 3.2.2 Chairperson; Secretary..................................................................................... 24 3.2.3 Meetings................................................................................................... 25 3.2.4 Decision Making............................................................................................ 25 3.2.5 Responsibilities of the MSC................................................................................ 25 3.3 Executive Steering Committee..................................................................................... 26 3.3.1 Formation; Membership...................................................................................... 26 3.3.2 Chairperson; Secretary..................................................................................... 26 3.3.3 Meetings................................................................................................... 26 3.3.4 Decision Making............................................................................................ 27 3.3.5 Dispute Resolution......................................................................................... 27 3.4 Authority........................................................................................................ 27 3.5 Project Coordinators............................................................................................. 27 4. RESEARCH AND DEVELOPMENT............................................................................................ 27 4.1 The Research Program............................................................................................. 27 4.1.1 General.................................................................................................... 27 4.2 Research & Development Plans..................................................................................... 28 4.2.1 Global Research and Development Plan....................................................................... 28 4.2.2 Annual Development Plans................................................................................... 28 4.3 Term of Research Program......................................................................................... 29 4.3.1 Screening Phase............................................................................................ 29 4.3.2 Research Phase............................................................................................. 29 4.3.3 Screening Phase Tail....................................................................................... 30 4.3.4 Development Phase.......................................................................................... 30 4.4 Selection of Additional Targets, Biomolecules, Hits, Lead Compounds, Development Candidates and Products......... 31 4.4.1 Selection of Additional Targets............................................................................ 31 4.4.2 Selection of Biomolecules as Compounds..................................................................... 31
________________________________________________________________________________ December 9, 1999 Collaboration Agreement Page iii 4.4.3 Selection of Hits...................................................................................... 31 4.4.4 Selection of Lead Compounds............................................................................ 31 4.4.5 Selection of Development Candidates.................................................................... 31 4.4.6 Selection of Products.................................................................................. 31 4.5 Conduct of the Research Program.............................................................................. 32 4.6 Funding of the Research Program.............................................................................. 32 4.6.1 Pre-Development Expenses............................................................................... 32 4.6.2 Development Expenses................................................................................... 33 4.6.3 Payment of Expenses; R&D Accounts...................................................................... 33 4.6.4 Expense Limitations.................................................................................... 33 4.6.5 Reconciliation of Expenses............................................................................. 34 4.6.6 Records and Audits..................................................................................... 35 4.7 Reporting and Disclosure..................................................................................... 36 4.7.1 Reports................................................................................................ 36 4.7.2 Quarterly Meeting...................................................................................... 36 4.7.3 Disclosure............................................................................................. 36 5. MANUFACTURING OF PRODUCTS; REGULATORY MATTERS................................................................... 36 5.1 Manufacturing................................................................................................ 36 5.2 Labeling..................................................................................................... 37 5.3 Regulatory Approvals......................................................................................... 37 5.4 Regulatory Reporting......................................................................................... 37 6. COMMERCIALIZATION OF PRODUCTS................................................................................... 38 6.1 Commercialization in the Copromotion Territory............................................................... 38 6.1.1 Principles of Copromotion.............................................................................. 38 6.1.2 Commercialization Plan................................................................................. 38 6.1.3 Allocation of Target Markets; Sales Effort............................................................. 39 6.1.4 Incremental Sales Force Effort......................................................................... 39 6.1.5 Extra Effort........................................................................................... 40 6.1.6 Performance Metrics.................................................................................... 40 6.1.7 Sales and Distribution; Recalls........................................................................ 40 6.1.8 Commercialization Expenses............................................................................. 41 (a) Pre-Marketing Expenses................................................................................. 41 (b) Sales and Marketing Expenses........................................................................... 41 (c) Post-Approval Research and Regulatory Expenses......................................................... 42 (d) Payment of Expenses; Marketing Accounts................................................................ 42 (e) Expense Limitations.................................................................................... 42 (f) Reconciliation of Pre-Marketing Expenses............................................................... 42 (g) Reimbursement of Sales and Marketing Expenses and Post Approval Research and Regulatory Expenses....... 43 6.1.9 Marketing and Promotional Materials.................................................................... 43 6.1.10 Promotional Claims..................................................................................... 44 6.1.11 Samples................................................................................................ 44 6.1.12 Communications......................................................................................... 44 6.1.13 Training............................................................................................... 45 6.1.14 Compliance............................................................................................. 45 6.1.15 Generic Product........................................................................................ 45 6.2 Commercialization in the AHPC Territory...................................................................... 46 7. CONSIDERATION; PROFIT SHARING................................................................................... 46 7.1 Research Program Expense Reimbursements...................................................................... 46 7.2 Additional Development Expense Payments...................................................................... 46 7.3 Purchase of Equity........................................................................................... 47 7.4 Royalties.................................................................................................... 47 7.4.1 Royalty Rates.......................................................................................... 47 7.4.2 Royalty Adjustments.................................................................................... 49 (a) Unpatented Products.................................................................................... 49 (b) Competition............................................................................................ 49
________________________________________________________________________________ December 9, 1999 Collaboration Agreement Page iv 7.4.3 Term of Royalty............................................................................................ 50 7.5 Profit Sharing................................................................................................... 50 7.5.1 Baseline Allocation of Profits; Penalties.................................................................. 50 7.5.2 Temporary Adjustments to Distribution of Profits........................................................... 50 7.5.3 Permanent Adjustment to Baseline Allocation of Profits..................................................... 51 7.5.2 Term of Profit Split Payments.............................................................................. 51 7.6 Reports and Payments............................................................................................. 51 7.6.1 Cumulative Royalties....................................................................................... 51 7.6.2 Royalty Statements and Payments............................................................................ 51 7.6.3 Net Profit Statements and Payments......................................................................... 51 (a) Estimated Statements....................................................................................... 51 (b) Actual Statements.......................................................................................... 52 7.6.4 Taxes and Withholding...................................................................................... 52 7.6.5 Currency................................................................................................... 53 7.7 Maintenance of Records; Audits................................................................................... 53 7.7.1 Record Keeping for the Copromotion Territory............................................................... 53 7.7.2 Record Keeping for the AHPC Territory...................................................................... 53 7.7.3 Audits..................................................................................................... 54 7.7.4 Underpayments/Overpayments................................................................................. 54 7.7.5 Confidentiality............................................................................................ 55 7.8 Interest......................................................................................................... 55 8. INTELLECTUAL PROPERTY............................................................................................... 55 8.1 Inventions....................................................................................................... 55 8.2 Patent Rights.................................................................................................... 55 8.2.1 Prosecution and Maintenance of Patent Rights............................................................... 55 (a) ViroPharma's Prior Inventions and Non-Collaboration Inventions............................................. 56 (b) AHPC's Prior Inventions and Non-Collaboration Inventions................................................... 56 (c) Collaboration Inventions................................................................................... 57 8.2.2 Enforcement of Patent Rights............................................................................... 58 (a) Notice and Discontinuance of Infringement - General........................................................ 58 (b) AHPC Patent Rights and ViroPharma Patent Rights............................................................ 58 (c) Collaboration Patent Rights................................................................................ 59 (d) Continuance of Infringement of ViroPharma Patent Rights.................................................... 60 (e) Continuance of Infringement of the AHPC Patent Rights...................................................... 60 8.2.3 Infringement and Third Party Licenses...................................................................... 61 (a) Infringement of Third Party Patents - Course of Action..................................................... 61 (b) AHPC Option to Negotiate................................................................................... 61 (c) Third Party Infringement Suit.............................................................................. 61 (d) Other Third Party Licenses................................................................................. 62 (e) Third Party License Fees................................................................................... 62 8.2.4 Patent Certifications...................................................................................... 63 8.2.5 Patent Term Restoration.................................................................................... 63 8.3 Trademarks.................................................................................................... 63 9. CONFIDENTIALITY..................................................................................................... 64 9.1 Confidentiality.................................................................................................. 64 9.2 Authorized Disclosure and Use.................................................................................... 64 9.2.1 Disclosure................................................................................................. 64 9.2.2 Use........................................................................................................ 65 9.3 SEC Filings...................................................................................................... 65 9.4 Publications..................................................................................................... 65 9.5 Public Announcements............................................................................................. 66 9.5.1 Coordination............................................................................................... 66 9.5.2 Announcements.............................................................................................. 66 10. REPRESENTATIONS AND WARRANTIES...................................................................................... 66 10.1 Representations and Warranties of Each Party..................................................................... 66 10.2 Additional Representations and Warranties of ViroPharma.......................................................... 67
________________________________________________________________________________ December 9, 1999 Collaboration Agreement Page v 10.3 Additional Representations and Warranties of AHPC............................................................ 69 10.4 Representation by Legal Counsel.............................................................................. 70 10.5 No Inconsistent Agreements................................................................................... 70 10.6 Disclaimer................................................................................................... 70 11. GOVERNMENT APPROVALS; TERM AND TERMINATION...................................................................... 70 11.1 Government Approvals......................................................................................... 70 11.1.1 ViroPharma's and AHPC's Obligations.................................................................... 70 11.1.2 Cooperation............................................................................................ 71 11.2 Term......................................................................................................... 71 11.3 Expiration................................................................................................... 71 11.4 Termination for Cause........................................................................................ 71 11.4.1 Termination for Cause................................................................................. 71 11.4.2 Effect of Termination for Cause on License............................................................. 72 11.5 Termination for Convenience.................................................................................. 72 11.5.1 Right to Terminate..................................................................................... 72 11.5.2 Effect of Termination for Convenience.................................................................. 72 11.6 Termination of ViroPharma's Right to Promote Products........................................................ 73 11.6.1 Failure to Provide Assigned Sales Force Effort......................................................... 73 11.6.2 Payment and Term of Royalty............................................................................ 74 11.6.3 Effect on Other Rights and Obligations................................................................. 75 11.7 Blocking Patents............................................................................................. 75 11.8 Survival of Certain Obligations.............................................................................. 75 11.9 Provision for Insolvency..................................................................................... 76 11.9.1Termination............................................................................................... 76 11.9.2 Effect on Licenses..................................................................................... 76 11.9.3 Rights to Intellectual Property........................................................................ 77 11.9.4 Additional Rights...................................................................................... 77 12. INDEMNIFICATION AND INSURANCE................................................................................... 78 12.1 Indemnification by AHPC...................................................................................... 78 12.2 Indemnification by ViroPharma................................................................................ 79 12.3 Procedure.................................................................................................... 79 12.4 Insurance.................................................................................................... 80 13. MISCELLANEOUS................................................................................................... 80 13.1 Assignment................................................................................................... 80 13.2 Further Actions.............................................................................................. 80 13.3 Force Majeure................................................................................................ 80 13.4 Correspondence and Notices................................................................................... 81 13.4.1 Ordinary Notices....................................................................................... 81 13.4.2 Extraordinary Notices.................................................................................. 81 13.5 Amendment.................................................................................................... 82 13.6 Waiver....................................................................................................... 82 13.7 Severability................................................................................................. 82 13.8 Descriptive Headings......................................................................................... 82 13.9 Governing Law................................................................................................ 83 13.10 Entire Agreement of the Parties.............................................................................. 83 13.11 Independent Contractors...................................................................................... 83 13.12 Debarment.................................................................................................... 83 13.13 Counterparts................................................................................................. 83
________________________________________________________________________________ December 9, 1999 Collaboration Agreement Page vi LIST OF EXHIBITS Exhibit 1.7 AHPC Patent Rights Exhibit 1.18 Class A Product Chemical Series Exhibit 1.23 Collaboration Targets Exhibit 1.50 Elements of Fully-Absorbed Standard Costs Exhibit 1.112 ViroPharma Patent Rights Exhibit 5.4 Adverse Event Reporting Procedures Exhibit 7.3 Stock Purchase Agreement Exhibit 7.4.1 Sample Calculation of Royalty Distributions Exhibit 7.5.3 Sample Calculation of Net Profit Distributions Exhibit 10.2(a) Third Party Rights, Title or Interest in ViroPharma Intellectual Property Exhibit 10.2(b) Third Party Claims on ViroPharma Patent Rights and Know-How Exhibit10.2(c) ViroPharma Intellectual Property Subject to Government Funding Agreements Exhibit 10.3(a) Third Party Claims on AHPC Patent Rights and Know- How ________________________________________________________________________________ December 9, 1999 Collaboration Agreement Page vii COLLABORATION AND LICENSE AGREEMENT THIS COLLABORTION AND LICENSE AGREEMENT (the "Agreement") is entered into on this 9th day of December, 1999 by and between American Home Products Corporation, acting through its Wyeth-Ayerst Laboratories Division ("AHPC"), a Delaware Corporation, having a place of business at 5 Giralda Farms, Madison, New Jersey 07940 and ViroPharma Incorporated ("ViroPharma"), a Delaware corporation having a place of business at 405 Eagleview Boulevard, Exton, Pennsylvania 19341. AHPC and ViroPharma may each be referred to herein individually as a "Party" and collectively as the "Parties". WHEREAS, AHPC is engaged in the research, development and commercialization of human pharmaceutical products; WHEREAS, ViroPharma is the owner of certain patent rights and know-how relating to the hepatitis C virus and compounds and methods for treating humans infected with the hepatitis C virus; WHEREAS, AHPC and ViroPharma have agreed to collaborate, on the terms and conditions set forth herein, on the development and commercialization of compounds for the treatment of humans infected with the hepatitis C virus. NOW THEREFORE, in consideration of the mutual promises and covenants set forth below and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties hereby agree as follows: 1. DEFINITIONS. 1.1 "Acquiring Entity" shall mean a Third Party that comes into control (as such term is defined in Section 1.4 hereof) of a Party or any of a Party's Affiliates through a Change in Control of such Party or such Affiliate occurring after the Effective Date hereof, and all other Third Parties controlling, controlled by or under common control with such Third Party, which Third Parties are not otherwise an Affiliate of such Party hereunder. 1.2 "Active Collaboration Target" shall mean a Collaboration Target (a) that is not discontinued from use in accordance with Section 4.4.1 or (b) against which an Active Compound has been determined to have activity during the Screening Phase or Screening Phase Tail, whether or not such Collaboration Target has been discontinued from use in accordance with Section 4.4.1. Notwithstanding the foregoing, if, at any time after the end of the Screening Phase Tail, (a) a Collaboration Target has been discontinued from use in accordance with Section 4.4.1, (b) the use of such Collaboration Target has not been reinstated in accordance with Section 4.4.1, and (c) all Compounds which, during the Screening Phase or the Screening Phase Tail, were determined to have activity against such Collaboration Target and all Derivatives of such Compounds are no longer Active Compounds, then such Collaboration Target shall thereafter not be an Active Collaboration Target for purposes of this Agreement. 1.3 "Active Compound" shall mean a Compound that is being Researched, Developed or Commercialized by either of the Parties pursuant to this Agreement. For the sake of clarity, when the JSC or the MSC, as applicable, determines to discontinue the Research, Development or Commercialization of a Compound, such Compound shall no longer be an Active Compound for purposes of this Agreement. 1.4 "Affiliate(s)" shall mean, with respect to each Party hereto, any corporation, company, partnership, joint venture, firm and/or other entity that controls, is controlled by or is under common control with such Party. For purposes of Section 1.1 and this Section 1.4, "control" shall mean (x) in the case of corporate entities, direct or indirect ownership of at least fifty percent (50%) of the stock or shares having the right to vote for the election of directors (other than such ownership by an employee benefit plan (or related trust) sponsored or maintained by a Party), and (y) in the case of non- corporate entities, direct or indirect ownership of at least fifty percent (50%) of the equity interest with the power to direct the management and policies of such non-corporate entities. Notwithstanding the foregoing, for purposes of this Agreement, the term "Affiliate" shall not include (a) subsidiaries or any other entities in which a Party owns a majority of the ordinary voting power necessary to elect a majority of the board of directors or other governing board but is restricted from electing such majority by contract or otherwise until such time as such restrictions are no longer in effect, or (b) an Acquiring Entity that comes into control of ViroPharma or a parent company Affiliate of ViroPharma after the Effective Date hereof, provided that ViroPharma, on or before the date such Change of Control becomes effective, delivers to AHPC written notice stating that such Acquiring Entity shall not be considered to be an Affiliate of ViroPharma and shall be considered to be a Third Party for all purposes of this Agreement and, provided further, that, by written agreement (a copy of which shall be provided to AHPC along with the notice described above in this Section 1.4(b)) between ViroPharma and such Acquiring Entity, such written agreement to be entered into either before or promptly after such Change of Control becomes effective and to designate AHPC as a third party beneficiary, such Acquiring Entity shall have (i) no right, title or interest in or to any Product hereunder, including, without limitation, the right to participate in the Copromotion of any Product in the Copromotion Territory (other than any such right, title or interest that may be merely incidental to the Acquiring Entity's having an equity interest in ViroPharma, e.g., an ownership interest in or right to receive a share of ViroPharma's profits), (ii) no right to participate in any of the activities to be conducted by or on behalf of ViroPharma or ViroPharma's Affiliates hereunder or to exercise any of ViroPharma's rights hereunder (other than any such right that may exist as a result of a director or employee of the Acquiring Entity serving as an officer or director of ViroPharma, provided, however, that each such director or employee shall not utilize any information gained through participating in such activities for the benefit of the Acquiring Entity in any way that the Acquiring Entity is prohibited from using such information pursuant to this Section 1.4), and (iii) no access to or right to use, itself or on behalf of any Third Party or to permit any Third Party to use, in either case for the discovery, development and/or commercialization of pharmaceutical products in the Field, any (A) of the ViroPharma Technology, (B) Compound included within the ViroPharma Chemical Library, (C) of the AHPC Technology, (D) Compound included with the AHPC Chemical Library, or (E) Confidential Information of either Party relating to the Field, the Research Program or either Party's activities under this Agreement, (except to the extent that any of the foregoing constitute Permitted Materials (as such term is defined below in this Section 1.4), it being understood, however, that in the event that either (xx) the written agreement between ViroPharma and such Acquiring Entity described above expires or is later terminated, (yy) ViroPharma provides AHPC with written notice that it desires such Acquiring Entity to be considered an Affiliate hereunder or (zz) such Acquiring Entity otherwise gains access to or the right to use, itself or on behalf of any Third Party, any materials or information included within items A through E, inclusive, described in clause (iii) above for the discovery, development and/or commercialization of pharmaceutical products in the Field, except to the extent that such material or information constitutes Permitted Materials, such Acquiring Entity thereafter shall be considered to be an Affiliate of ViroPharma for all purposes of this Agreement, including, without limitation, the provisions set forth in Section 2.6 hereof. For purposes of this Section 1.4, "Permitted Materials" shall mean any of items A through E, inclusive, described above in this Section 1.4, which (I) the Acquiring Entity can demonstrate, through written records created prior to the effective date of the Change of Control of ViroPharma, was in the Acquiring Entity's prior possession, other than through receipt, directly or indirectly from ViroPharma, (II) the Acquiring Entity can demonstrate, through written records, was acquired by the Acquiring Entity from a Third Party who had the right to disclose or transfer the same to the Acquiring Entity; (III) the Acquiring Entity can demonstrate, through written records, was independently developed by employees of the Acquiring Entity who had no knowledge of or access to any of items A through E, inclusive, described above in this Section 1.4; (IV) becomes part of the public domain after the date this Agreement was signed by the Parties other than through any breach of this Agreement by ViroPharma; or (V) is made available to such Acquiring Entity by AHPC or any of AHPC's Affiliates; provided, however, that none of the foregoing exclusions shall result in the Acquiring Entity having any right to: 1. practice any of the ViroPharma Patent Rights for the discovery, development and/or commercialization of pharmaceutical products in the Field, 2. practice any of the AHPC Patent Rights except through a license granted by AHPC directly to such Acquiring Entity, 3. practice any of the Collaboration Patent Rights for the discovery, development and/or commercialization of pharmaceutical products in the Field, 4. utilize Compounds included within the ViroPharma Chemical Library for the discovery, development and/or commercialization of pharmaceutical product in the Field, or 5. utilize Compounds included within the AHPC Chemical Library, which Compounds are obtained directly or indirectly from ViroPharma, except through a license granted by AHPC directly to such Acquiring Entity. 1.5 "AHPC Chemical Library" shall mean those Compounds that AHPC, as of the Effective Date owns or Controls, or that come into AHPC's Control during the of the Research Program, provided, however, that for purposes of this Agreement, the AHPC Chemical Library shall not include those Compounds in the agricultural chemical library of AHPC's subsidiary, American Cyanamid Company. 1.6 "AHPC Know-How" shall mean Know-How, excluding the Collaboration Know- How, that AHPC owns or Controls as of the Effective Date or that comes into the Control of AHPC during the term of this Agreement. 1.7 "AHPC Patent Rights" shall mean Patent Rights that AHPC owns or Controls as of the Effective Date or that come into the Control of AHPC during the term of this Agreement, which Patent Rights claim any AHPC Prior Invention and/or AHPC Non-Collaboration Invention. Those AHPC Patent Rights known to be existing as of the Effective Date are listed on Exhibit 1.7 attached hereto. 1.8 "AHPC Technology" shall mean the AHPC Patent Rights, AHPC's interest in the Collaboration Patent Rights, the AHPC Know-How, AHPC's interest in the Collaboration Know-How and the AHPC Assay and Screening Technology. 1.9 "AHPC Territory" shall mean the world other than the countries included within the Copromotion Territory. 1.10 "Annual Commercialization Plan and Budget" shall have the meaning set forth in Section 6.1.2. 1.11 "Annual Development Plan and Budget" shall have the meaning set forth in Section 4.2.2. 1.12 "Assay and Screening Technology" shall mean the Know-How, methods and technology owned or Controlled by either Party which may be used for the screening of Compounds for activity against one or more Collaboration Targets. 1.13 "Assigned Sales Force Effort" shall mean ******* in a ********** during any Calendar Quarter or calendar year, as applicable, as assigned by the MSC under the then applicable Annual Commercialization Plan and Budget and in accordance with Section 6.1.3. 1.14 "Baseline Allocation of Net Profits" shall have the meaning set forth in Section 7.5.1. 1.15 "Biomolecule" shall mean a polypeptide, protein, vaccine or antibody, any of which is either of natural origin, expressed by recombinant methodology or chemically synthesized or which may be a chemical structure derived therefrom, an analog, derivative, congener or the like. 1.16 "Calendar Quarter" shall mean the respective periods of three consecutive calendar months ending on March 31, June 30, September 30 or December 31, for so long as this Agreement is in effect. 1.17 "Change of Control" shall mean any of the following: (a) the sale or disposition of all or substantially all of the assets of a Party to a Third Party, (b) the acquisition by a Third Party, other than an employee benefit plan (or related trust) sponsored or maintained by a Party or any of its Affiliates, of more than 50% of such Party's outstanding shares of voting capital stock, or (c) the merger or consolidation of a Party with or into another corporation, other than a merger or consolidation of a Party in which holders of shares of such Party's voting capital stock immediately prior to the merger or consolidation will have at least 50% of the ownership of voting capital stock of the surviving corporation immediately after the merger or consolidation. 1.18 "Class A Product" shall mean any Product that: ********************. 1.19 "Class B Product" shall mean ********************. 1.20 "Collaboration Inventions" shall mean all Inventions owned or Controlled by either Party which Inventions are made by either Party's employees, agents or subcontractors in the performance of such Party's obligations under the Research Program or in performing any research and development of a Product, pursuant to this Agreement, after such Product has received Regulatory Approval, including, without limitation, Phase IV clinical studies and clinical studies in support of additional indications within the Field or labeling changes for such Product during the term of this Agreement, regardless of whether such Inventions are made solely by such Party's employees, agents or subcontractors or jointly with the employees, agents or subcontractors of the other Party. 1.21 "Collaboration Know-How" shall mean that Know-How that is created or developed by or on behalf of either Party, either alone or jointly with the other Party, in performing its obligations under the Research Program or in performing any Post-Approval Research. 1.22 "Collaboration Patent Rights" shall mean those Patent Rights that include claims directed to Collaboration Inventions. 1.23 "Collaboration Target" shall mean any Target that is (a) listed in Exhibit 1.23 attached hereto, (b) selected by the JSC in accordance with Section 4.4.1 or (c) used by either Party in its performance of the Research Program for Screening Compounds for potential activity as a prophylactic or therapeutic agent in the Field. 1.24 "Collaboration Technology" shall mean the Collaboration Patent Rights and the Collaboration Know-How. 1.25 "Commercialization" shall mean any and all activities of making, having made, using, importing, marketing, promoting, distributing, offering for sale and selling a Product in the Field and shall include Promotion. When used as a verb, "Commercialize" shall mean to engage in Commercialization. 1.26 "Commercially Reasonable Efforts" shall mean efforts and resources normally used by a Party for a product or compound owned by it or to which it has rights, which is of similar market potential at a similar stage in its development or product life, taking into account issues of safety and efficacy, product profile, the competitiveness of the marketplace, the proprietary position of the compound or product, the regulatory structure involved, the profitability of the applicable products, and other relevant factors. 1.27 "Compound" shall mean a chemical compound or substance together with all complexes, mixtures and other combinations, prodrugs, metabolites, enantiomers, salt forms, racemates, and isomers thereof. For the sake of clarity, the term "Compounds" may include both Small Molecules and Biomolecules, provided, however, that, with respect to Biomolecules, only those Biomolecules selected for collaborative Research pursuant to Section 4.4.2, shall be considered to be Compounds hereunder. 1.28 "Confidential Information" shall mean with respect to each Party, non- public proprietary data or information which belong in whole or in part to such Party or its Affiliates and/or information designated as Confidential Information of such Party hereunder. 1.29 "Control" or "Controlled" shall mean with respect to any (a) item of information, including, without limitation, Know-How, or (b) intellectual property right, the possession (whether by ownership or license, other than pursuant to this Agreement) by a Party of the ability to grant to the other Party access and/or a license as provided herein under such item or right without violating the terms of any agreement or other arrangements with any Third Party existing before or after the Effective Date. 1.30 "Copromotion Territory" shall mean: (a) the fifty (50) states of the United States and the District of Columbia, and (b) Canada. 1.31 "Copromotion Territory Commercialization Plan" shall have the meaning set forth in Section 6.1.2. 1.32 "Copyright" shall mean any copyright owned or Controlled by AHPC which copyright pertains to the promotional materials and literature utilized by the Parties in connection with the Promotion of Products in the Copromotion Territory pursuant to Section 6.1. 1.33 "Cost of Goods Manufactured for Sale" shall mean AHPC's actual cost to acquire Product from a Third Party, or its Fully-Absorbed Standard Cost to produce the Product, plus (or minus, as the case may be): (a) AHPC's costs for Product inventory adjustments and losses, (b) any manufacturing cost variances allocable to such Product, (c) amortization of new standard costs for such Product, (d) prior period adjustments allocable to such Product, and (e) actual distribution costs (other than those deducted as part of the calculation of Net Sales pursuant to Section 1.71(a)(v)), warehousing costs and billing, receiving, collection and other miscellaneous costs incurred by AHPC as they relate to distribution of the Products. 1.34 "Derivative" of a given Compound shall mean a chemical compound derived by addition to or manipulation of a fundamental structure of such Compound. 1.35 "Detail" shall mean a face-to-face meeting between one or more Target Physicians and one or more professional sales representative, made in compliance with the Target Market allocation of the MSC under Section 6.1.3, during which a complete Product presentation, as defined from time to time by the MSC, is communicated, which Product presentation is either the first or second product-related information communicated by such professional sales representative during such meeting. When used as a verb, "Detail" shall mean to perform a Detail. 1.36 "Development" shall mean, on a country by country basis, all activities performed by or on behalf of either Party pursuant to the Global Research and Development Plan on a Compound in the Field from the effective date of an IND for such Compound until Regulatory Approval of such Compound is obtained in such country for the indication under study. When used as a verb, "Develop" shall mean to engage in Development. 1.37 "Development Candidate" shall mean a Lead Compound or any Derivative thereof or any other Compound for use in the Field, that the JSC, in accordance with Section 4.4.5, selects or otherwise designates for further development to IND filing. 1.38 "Development Expenses" shall mean, on a Compound by Compound and Product by Product basis, the expenses (other than Third Party License Fees) of the Parties incurred in performing the Development Phase of the Research Program and obtaining Regulatory Approval for such Compound or Product pursuant to the Global Research and Development Plan. 1.39 "Development Phase" shall have the meaning set forth in Section 4.3.4. 1.40 "Effective Date" shall mean the date of this Agreement first set forth above. 1.41 "Executive Steering Committee" or "ESC" shall have the meaning set forth in Section 3.3.1. 1.42 "Extra Effort" shall have the meaning set forth in Section 6.1.5. For the sake of clarity, Extra Effort shall not include any Incremental Sales Force Effort. 1.43 "Extra Effort Expense" shall mean the cost to be charged to a Party's Marketing Account in accordance with Section 6.1.5 due to such Party's provision of Extra Effort. 1.44 "FDA" shall mean the United States Food and Drug Administration or any successor agency thereto. 1.45 "FD&C Act" shall mean the United States Federal Food, Drug, and Cosmetic Act, as amended, and the regulations promulgated thereunder. 1.46 "Field" shall mean the therapeutic and/or prophylactic treatment of the effects of HCV on humans. 1.47 "First Commercial Sale" shall mean, with respect to any Product and any country of the world, the first sale of such Product under this Agreement, for use in the Field, to a Third Party in such country, after such Product has been granted Regulatory Approval for use in the Field by the competent Regulatory Authorities in such country. 1.48 "FTE" shall mean a full time equivalent scientific person year consisting of a minimum of a total of one thousand eight hundred eighty hours (1,880) per year of scientific work on or directly related to the Research Program. Work on or directly related to the Research Program can include, but is not limited to, experimental preclinical and clinical laboratory and research work, recording and writing up results, reviewing literature and references, holding scientific discussions, managing and leading scientific staff, carrying out management duties related to the Research Program, and, only to the extent specifically pre-approved in writing by both ViroPharma and AHPC, writing up results for publications or presentation and attending or presenting appropriate seminars and symposia. 1.49 "Full Royalty Rate Period" for a Product sold in any given country means the period during which either or both of the following is true: (a) AHPC's distribution and/or sale of the applicable Product in the applicable country, in the absence of the rights and licenses granted by this Agreement, would have infringed one or more Valid Claims under Patent Rights, including Collaboration Patent Rights, then owned in whole or part by ViroPharma; (b) AHPC's manufacture of the Product, in the absence of the rights and licenses granted by this Agreement, would have infringed one or more Valid Claims under Patent Rights, including Collaboration Patent Rights, then owned in whole or part by ViroPharma, provided that, except as may be precluded or limited by applicable law, the Full Royalty Rate Period for such Product in such country shall not expire before the tenth (10/th/) anniversary of the First Commercial Sale of such Product in such country. 1.50 "Fully-Absorbed Standard Cost" shall mean the cost for those items specified in Exhibit 1.50 attached hereto, which costs are calculated in accordance with generally accepted accounting principles and have been incurred by AHPC or its Affiliates in manufacturing (i) materials to be used by the Parties in conducting clinical trials of Compounds or Products hereunder or (ii) Products for sale or distribution in the Copromotion Territory hereunder. 1.51 "Global Research and Development Plan" shall have the meaning set forth in Section 4.2.1. 1.52 "Good Clinical Practice" or "GCP" shall mean the then current standards for clinical trials for pharmaceuticals, as set forth in the United States Federal Food, Drug and Cosmetics Act and applicable regulations promulgated thereunder, as amended from time to time, and such standards of good clinical practice as are required by the European Union and other organizations and governmental agencies in countries in which the Products are intended to be sold, to the extent such standards are not inconsistent with United States GCP. 1.53 "Good Laboratory Practice" or "GLP" shall mean the then current standards for laboratory activities for pharmaceuticals, as set forth in the United States Federal Food, Drug and Cosmetics Act and applicable regulations promulgated thereunder, as amended from time to time, and such standards of good laboratory practice as are required by the European Union and other organizations and governmental agencies in countries in which the Products are intended to be sold, to the extent such standards are not inconsistent with United States GLP. 1.54 "HCV" shall mean the hepatitis C virus. 1.55 "Hit" shall mean a Compound identified by early screening, in assays conducted pursuant to protocols approved by the JSC, during the Screening Phase or the Screening Phase Tail that the JSC confirms, in accordance with Section 4.4.3 hereof, has activity against the applicable Collaboration Target that meets or exceeds an active threshold established by the JSC for that Collaboration Target. 1.56 "Incremental Sales Force Effort" shall have the meaning set forth in Section 6.1.4. For the sake of clarity, "Incremental Sales Force Effort" shall not include any Extra Effort. 1.57 "Incremental Sales Force Effort Expense" shall mean the cost to be charged to a Party's Marketing Account in accordance with Section 6.1.4 hereof due to such Party's provision of an Incremental Sales Force Effort. 1.58 "IND" shall mean an Investigational New Drug Application, as defined in the FD&C Act, that is required to be filed with the FDA before beginning clinical testing of a Product in human subjects, or an equivalent foreign filing. 1.59 "Initial Term of the Screening Phase" shall have the meaning set forth in Section 4.3.1. 1.60 "Invention" shall mean any invention in the Field that encompasses or relates to any Assay and Screening Technology, any Collaboration Target, any Compound that is Screened, Researched, or Developed under the Research Program, any Derivatives of any such Compounds, any Product and any method of making any such Compound, Derivative, or Product and any method of using any such Compound, Derivative or Product. 1.61 "Joint Steering Committee" or "JSC" shall have the meaning set forth in Section 3.1. 1.62 "Know-How" shall mean, as each of the following relates to the Field, all know-how, processes, materials, information, data and analyses including any copyright relating thereto Controlled by either Party or its Affiliates as of the Effective Date or coming into the Control of either Party or its Affiliates during the term of this Agreement relating to any Assay and Screening Technology, any Collaboration Target, any Compound that is at any time screened or developed under the Research Program, any Derivatives of any such Compounds, any Product and any method of making any such Compound, Derivative, or Product and any method of using any such Compound, Derivative or Product. 1.63 "Lapse Quarter" for a Party shall mean, on a Product by Product and country by country basis in the Copromotion Territory, any Calendar Quarter in which: (a) the Party has delivered less than ************* of its then current Assigned Sales Force Effort, and (b) such percentage portion of its then current Assigned Sales Force Effort is at ************** lower than the portion of the other Party's Assigned Sales Force Effort actually performed by such other Party. 1.64 "Lapse Year" for a Party shall mean, on a Product by Product and country by country basis in the Copromotion Territory, any calendar year in which such Party has three (3) or more Lapse Quarters. 1.65 "Lead Compound" shall mean a Compound with: (a) sufficient potency and selectivity, based on activity against a Collaboration Target and activity in secondary selectivity assays, which activity levels and selectivity indices have been established by the JSC, (b) chemical tractability, (c) a preliminary indication of chemical structure- activity relationships and (d) a clear basis for initiating chemical optimization. 1.66 "Major European Country" shall mean any of France, Germany, Italy, or the United Kingdom. 1.67 "Marketing Account" shall have the meaning set forth in Section 6.1.8(d). 1.68 "Marketing Steering Committee" or "MSC" shall have the meaning set forth in Section 3.2. 1.69 "NDA" shall mean a New Drug Application, as defined in the FD&C Act, that is required to be approved by the FDA before marketing a Product, or an equivalent foreign filing. 1.70 "Net Profits" shall mean, with respect to the sales of any Product in a country of the Copromotion Territory, the Net Sales of such Product in such country, less the following expenses (deducted in the sequence listed) allocable to such Product in such country: (a) the Cost of Goods Manufactured for Sale, and (b) the Parties' combined Sales and Marketing Expenses, a Party's Incremental Sales Force Expenses, if any, a Party's Extra Effort Expense, if any, and the Parties' combined Post-Approval Research and Regulatory Expenses. 1.71 "Net Sales" shall mean the gross amounts charged for sales of Products by AHPC, its Affiliates, or sublicensees, as appropriate, to non-Affiliate Third Parties on which payments are due under this Agreement, less the sum of (a) and (b) where (a) is a provision, determined under Generally Accepted Accounting Principles in the United States, for (i) reasonable trade, cash and quantity discounts or rebates (other than price discounts granted at the time of sale), reasonable service allowances and reasonable broker's or agent's commissions, if any, actually allowed or paid, (ii) credits or allowances actually given or made for rejection or return of, previously sold Products or for retroactive price reductions (including Medicaid, managed care and similar types of rebates), (iii) taxes, duties or other governmental charges levied on or measured by the billing amount (excluding income and franchise taxes), as adjusted for rebates and refunds, and (iv) reasonable credits or allowances actually given or made for wastage replacement, and (v) charges actually incurred for packing, freight, and shipping from AHPC's or its Affiliates' distribution center and insurance directly related to such packing, freight, and shipping of such Product (excluding amounts reimbursed by Third Party customers and any amounts associated with packing, freight, and shipping to and holding at AHPC's or its Affiliate's distribution center, which amounts are included within the Cost of Goods Manufactured for Sale) and (b) is a periodic adjustment of the provision determined in (a) to reflect amounts actually incurred for (i), (ii), (iii), (iv), and (v). A "sale" of a Product is deemed to occur upon the invoicing, or if no invoice is issued, upon the earlier of shipment or transfer of title in the Product to a Third Party. If a Product is sold or distributed for use in combination with or as a component of another product or products (a "Combination Product"), the calculation of "Net Sales" from such Combination Product will be determined by multiplying the Net Sales for such Combination Product calculated as set forth above by a fraction, the numerator of which is the fair market value of the Product in such Combination Product, and the denominator of which is the fair market value of the Combination Product. If a Product is sold as part of a bundle of distinct products (i.e., not (i) packaged together with another product or (ii) in a Combination Product form alone,) the Net Sales for such Product will be based on the discounted unit price of such Product sales, which discounted unit price shall be proportional to the total discount provided for the entire bundle (e.g., if, the price for the bundle of products is twenty percent (20%) lower than the price that would be charged by AHPC, its Affiliates or sublicensees for the same group of products if sold separately, based on the average unit price of such products when sold separately, then the discounted unit price attributable to the Product when sold as part of such bundle would be eighty percent (80%) of the average unit price of the Product when sold separately by AHPC, its Affiliates or sublicensees. 1.72 "Non-Collaboration Invention" of a Party shall mean an Invention owned or Controlled by either Party, which Invention (a) is made solely by such Party's employees, agents or subcontractors during the term of this Agreement or otherwise comes into the Control of such Party during the term of this Agreement and(b) is not made in the performance of the Research Program. 1.73 "Patent Rights" shall mean any and all (a) patents, (b) pending patent applications, including, without limitation, all provisional applications, substitutions, continuations, continuations-in-part, divisions, renewals, and all patents granted thereon, and (c) all patents-of-addition, reissues, reexaminations and extensions or restorations by existing or future extension or restoration mechanisms, including, without limitation, supplementary protection certificates or the equivalent thereof, that, (i) during the Term of this Agreement, are owned or Controlled by either Party, and (ii) claim any Invention. 1.74 "Penalty Year" for a Party shall mean the calendar year following a Lapse Year. 1.75 "Phase I Clinical Study" shall mean a study, conducted in accordance with a protocol approved by the JSC, of a Development Candidate in human volunteers or patients with the endpoint of determining initial tolerance, safety and/or pharmacokinetic information in single dose, single ascending dose, multiple dose and/or multiple ascending dose regimens. 1.76 "Phase II Clinical Study" shall mean a study, conducted in accordance with a protocol approved by the JSC, of a Development Candidate in patients to determine initial efficacy and dose range finding before embarking on Phase III Clinical Studies. 1.77 "Phase III Clinical Study" shall mean a pivotal study in patients, , conducted in accordance with a protocol approved by the JSC, which protocol is designed to ascertain efficacy and safety of a Product for the purpose of preparing and submitting applications for Regulatory Approval to the competent Regulatory Authorities in a country of the world. 1.78 "Post-Approval Research and Regulatory Expenses" shall mean those expenses incurred, on a Product by Product and country by country basis, by either Party directly attributable to (a) ongoing research and development of a Product after such Product has received Regulatory Approval in such country of the Copromotion Territory, including, without limitation, Phase IV clinical studies and clinical studies in support of additional indications within the Field or labeling changes for such Product in such country and/or (b) complying with its regulatory reporting obligations in the Copromotion Territory in accordance with Section 5.4. 1.79 "Pre-Development Expenses" shall mean, on a Compound by Compound basis, the expenses (other than Third Party License Fees) incurred by the Parties after the Effective Date in performing the Screening Phase and the Research Phase of the Research Program. 1.80 "Pre-Marketing Expenses" shall mean those expenses incurred on a country by country and Product by Product basis within the Copromotion Territory, by either Party, other than R&D Expenses, before Regulatory Approval of a Product in such country, directly attributable to the carrying out of such Party's obligations under the Copromotion Territory Commercialization Plan in preparation for the marketing, promotion, sale and distribution of such Product in such country. Such expenses may include, without limitation, costs incurred for professional education, Product related public relations, relationships with opinion leaders and professional societies, market research, health care economics studies, and establishment of the supply chain for the distribution and sale of such Product in such country. Such expenses may include both internal expenses incurred by a Party as well as out-of-pocket expenses paid to Third Parties by a Party at reasonable rates pre-approved by the MSC. 1.81 "Pre-Marketing Expense Shortfall" shall have the meaning set forth in Section 6.1.8(f). 1.82 "Prior Invention" of a Party shall mean an Invention owned or Controlled by either Party, which Invention is made solely by the Party's employees, agents or subcontractors before the Effective Date or which otherwise came into the Control of such Party before the Effective Date. 1.83 "Product" shall mean any pharmaceutical product, for use in the Field, containing one or more Development Candidates as an active ingredient. 1.84 "Promotion" shall mean those activities, including, without limitation, Detailing and distributing Samples of a Product, normally undertaken by a pharmaceutical company's sales force to implement marketing plans and strategies aimed at encouraging the appropriate use of a particular Product. When used as a verb, "Promote" shall mean to engage in such activities. 1.85 "R&D Account" shall have the meaning set forth in Section 4.6.3. 1.86 "R&D Reimbursement Account" shall have the meaning set forth in Section 7.1(b). 1.87 "R&D Shortfall" shall have the meaning set forth in Section 4.6.5. 1.88 "Reduced Royalty Rate Period" for a Product in a country means the period beginning on the expiration of the Full Royalty Rate Period for the Product in that country, or if there is no Full Royalty Rate Period for that Product in that country, then beginning on the First Commercial Sale of the Product in that Country, and ending on the twenty-fifth (25/th/) anniversary of the Effective Date. 1.89 "Regulatory Approval" shall mean the technical, medical and scientific licenses, registrations, authorizations and approvals (including, without limitation, approvals of NDAs, supplements and amendments, pre- and post-approvals, pricing and third party reimbursement approvals, and labeling approvals) of any national, supra-national, regional, state or local regulatory agency, department, bureau, commission, council or other governmental entity, necessary for the commercial manufacture, distribution, marketing, promotion, offer for sale, use, import, export and sale of Product(s) in a regulatory jurisdiction. 1.90 "Regulatory Authority" shall mean any national (e.g., the United States Food and Drug Administration), supra-national (e.g., the European Commission, the Council of the European Union, or the European Agency for the Evaluation of Medicinal Products), regional, state or local regulatory agency, department, bureau, commission, council or other governmental entity in each country of the world involved in the granting of Regulatory Approval for the Product. 1.91 "Research" shall mean, on a Compound by Compound basis, those preclinical activities undertaken by or on behalf of either Party subsequent to Screening and prior to Development of such Compound, including, without limitation, medicinal chemistry, pharmacology, preclinical toxicology, and formulation of such Compound in the Field. 1.92 "Research Phase" shall have the meaning set forth in Section 4.3.2. 1.93 "Research Program" shall have the meaning set forth in Section 4.1. 1.94 "Sales and Marketing Expenses" shall mean those expenses directly allocable, on a Product by Product and country by country basis, to the Parties' market development and/or Promotion of such Product in the Copromotion Territory, consistent with the Copromotion Territory Commercialization Plan for such Product. Sales and Marketing Expenses shall include: (a) costs for Promotion of the Product, excluding costs of the field sales force personnel (i.e., Detailing expenses, including, without limitation, salaries, bonus, benefits, sales force automation, and personnel expenses -- telephone, supplies, postage, meetings, travel and voice mail including all information technology); (b) out-of-pocket payments to Third Parties incurred by such Party and specifically attributable to such Party's performance under the Copromotion Territory Commercialization Plan, excluding Third Party License Fees, (c) costs for activities related to obtaining reimbursement from payers, (d) market research costs (including, without limitation, actual costs of sales and marketing data), (e) marketing and advertising costs (including, without limitation, cost for preparing and reproducing detail aids and other promotional materials), (f) professional education, (g) Product related public relations, (h) costs of pharmacoeconomics studies, (i) costs for manufacturing and distributing Product Samples, and (j) costs for conducting seminars and establishing relationships with opinion leaders and professional societies in connection with the Product. Such costs will include both internal costs (e.g., salaries, benefits, supplies and materials, etc.) as well as the actual amounts paid to outside service providers (e.g., consultants, agency fees, meeting costs, etc.). Sales and Marketing Expenses will specifically exclude the cost of activities that promote either Party's business as a whole without being Product specific (such as corporate image advertising) as well as Extra Effort Expenses, and Incremental Sales Force Expenses. 1.95 "Sample" shall mean a unit of a Product, as used by AHPC, that is not intended to be sold and is intended to promote the sale of such Product. When used as a verb, "Sample" shall mean to provide Samples to Target Physicians. 1.96 "Sample Receipt Forms" shall mean those multi-part paper forms (or an electronic version thereof) supplied by AHPC for the purpose of recording Detail and Sample activity performed by ViroPharma sales representatives during Details. These forms are also used as Sample receipts on which to obtain a physician's signature in acknowledgment of the physician's receipt of Samples. 1.97 "Screening" shall mean screening and identification of Compounds, including, without limitation, Compounds from the ViroPharma Chemical Library or the AHPC Chemical Library to determine whether such Compounds may have activity against an Active Collaboration Target. 1.98 "Screening Phase" shall have the meaning set forth in Section 4.3.1. 1.99 "Small Molecule" shall mean any Compound that is not a Biomolecule. 1.100 "Surviving Entity" of a Change of Control of ViroPharma shall mean: (a) a Third Party that has acquired substantially all of the assets of ViroPharma or 100% of the outstanding shares of voting capital stock of ViroPharma pursuant to a Change of Control, (b) a company that results from the merger of ViroPharma and another entity pursuant to a Change of Control, or (c) ViroPharma if a Third Party acquires more than 50% but less than 100% of the outstanding shares of voting capital stock of ViroPharma pursuant to a Change of Control. 1.101 "Tail Compound" shall have the meaning set forth in Section 4.3.3. 1.102 "Target" shall mean a molecular entity for which there is sufficient information, data, or valid reason to believe that perturbation of such entity would be sufficient to prevent or affect the course of human disease caused by the HCV. 1.103 "Target Market" shall mean the segments of the overall market for a Product to whom a Party will Promote such Product. 1.104 "Target Physician" shall mean each physician and other health care professional and organization to whom either Party Details a Product in the Copromotion Territory. 1.105 "Term of the Screening Phase" shall mean, with respect to any Compound, the Initial Term of the Screening Phase and all extensions made thereto with respect to such Compound in accordance with Section 4.3.1. 1.106 "Third Part(y/ies)" shall mean any person(s) or entit(y/ies) other than AHPC, ViroPharma or their respective Affiliates. 1.107 "Third Party License Fee" shall mean license fees, royalties and other amounts paid to any Third Party for the license under intellectual property rights of technology necessary or useful for Screening, Research, Development or Commercialization, which license is entered into, during the term of this Agreement, by a Party pursuant to Section 8.2.3. 1.108 "Trademark" shall mean those registered trademarks used in connection with the Commercialization of any Product by either Party hereunder, provided, however, that the term "Trademark" shall not include the tradename of either Party or any trademark or tradedress of either Party which is not used exclusively in connection with the Products Commercialized under this Agreement. 1.109 "Valid Claim" shall mean a claim that (i) in the case of any unexpired United States or foreign patent, shall not have been donated to the public, disclaimed, nor held invalid or unenforceable by a court or government agency of competent jurisdiction in an unappealed or unappealable decision, or (ii) in the case of any United States or foreign patent application, shall not have been canceled, withdrawn, or abandoned without being refiled in another application or finally rejected by an administrative agency action from which no appeal can be taken, or shall not have been pending for more than five years. For purposes of this definition, time periods shall be measured cumulatively for claims in a later filed application in a country which are substantially the same as claims in an earlier filed application in that country. If a claim of a patent application that ceased to be a Valid Claim under (ii) due to the passage of time later issues as part of a patent described within (i) then it shall again be considered to be a Valid Claim effective as of the issuance of such patent. 1.110 "ViroPharma Chemical Library" shall mean those Compounds that ViroPharma, as of the Effective Date owns or Controls, or that come into ViroPharma's Control during the term of the Research Program. 1.111 "ViroPharma Know-How" shall mean Know-How, excluding the Collaboration Know-How, that ViroPharma owns or Controls as of the Effective Date or that comes into the Control of ViroPharma during the term of this Agreement. 1.112 "ViroPharma Patent Rights" shall mean Patent Rights that ViroPharma owns or Controls as of the Effective Date or that come into the Control of ViroPharma during the term of this Agreement, which Patent Rights claim any ViroPharma Prior Invention and/or ViroPharma Non-Collaboration Invention. Those ViroPharma Patent Rights known to be existing as of the Effective Date are listed on Exhibit 1.112 attached hereto. 1.113 "ViroPharma Technology" shall mean the ViroPharma Patent Rights, ViroPharma's interest in the Collaboration Patent Rights, the ViroPharma Know-How, ViroPharma's interest in the Collaboration Know-How, and the ViroPharma Assay and Screening Technology. 2. LICENSES. 2.1 Licenses to AHPC. Subject to the terms and conditions of this Agreement, including, without limitation, Sections 2.4 and 2.6 hereof, ViroPharma hereby grants to AHPC: (a) the exclusive worldwide right and license, without the right to grant sublicenses (except to AHPC's Affiliates or ViroPharma), to use the ViroPharma Technology, the ViroPharma Chemical Library, and the Collaboration Targets only to the extent necessary for AHPC to exercise its rights and perform its obligations under the Research Program and to exercise its rights and perform its obligations during the Screening Phase Tail; and (b) the exclusive worldwide right and license, with the right to sublicense one or more of its Affiliates, ViroPharma and/or Third Parties (provided, however, that in the Copromotion Territory, AHPC may only grant sublicenses to one or more or its Affiliates and ViroPharma), to use the ViroPharma Technology, the Collaboration Targets, and the ViroPharma Chemical Library only to the extent necessary to Develop and Commercialize Hits, Lead Compounds, Development Candidates and Products for use in the Field. 2.2 Licenses to ViroPharma. Subject to the terms and conditions of this Agreement, including, without limitation, Sections 2.4 and 2.6 hereof, AHPC grants to ViroPharma: (a) the nonexclusive right and license, without the right to grant sublicenses (except to ViroPharma Affiliates), to use the AHPC Technology, the AHPC Chemical Library, the ViroPharma Technology, the ViroPharma Chemical Library, and the Collaboration Targets only to the extent necessary for ViroPharma to exercise its rights and perform its obligations under the Research Program and to exercise its rights and perform its obligations during the Screening Phase Tail; (b) the nonexclusive right and license, without the right to grant sublicenses (except to ViroPharma Affiliates), to use the AHPC Technology, the AHPC Chemical Library, the ViroPharma Technology, the ViroPharma Chemical Library, and the Collaboration Targets only to the extent necessary for ViroPharma to Promote Products in the Copromotion Territory in accordance with Section 6.1 of this Agreement; and (c) the nonexclusive right and license, without the right to grant sublicenses (except to ViroPharma Affiliates), to use the Trademarks and Copyrights in the Copromotion Territory during the term of this Agreement only to the extent such license is necessary for ViroPharma to Promote Products in the Copromotion Territory in accordance with Section 6.1 of this Agreement. 2.3 Sublicensing to Third Party Contractors. Notwithstanding any provision to the contrary in this Agreement, if pursuant to Section 4.5, the JSC approves the utilization of one or more Third Parties to perform certain tasks under the Research Program, the Party entering into a contract with such Third Party for the performance of such services, may, as part of such contract, grant to such Third Party a nonexclusive, nontransferable, nonsublicensable license or sublicense, as applicable, under the ViroPharma Technology or the AHPC Technology, as applicable, only to the extent and only for so long as such license or sublicense is necessary for such Third Party to perform such tasks under the Research Program. Likewise, to the extent that either Party enters into a contract with a Contract Sales Organization to perform all or part of its obligations in Promoting Products pursuant to Section 6.1.1 hereof, such Party may, as a part of such contract, grant to such Third Party a nonexclusive, nontransferable, nonsublicensable license or sublicense, as applicable, under the ViroPharma Terchnology or the AHPC Technology, as applicable, only to the extent and only for so long as such license or sublicense is necessary for such Third Party to perform such Promotion. All such contracts and sublicenses entered into by either Party with a Contract Sales Organization shall be subject to the prior written approval of the MSC, which approval shall not be unreasonably withheld or delayed. 2.4 Dropped Compounds. Upon the written determination of the JSC not to advance a Compound further in Screening, Research, Development, or Commercialization hereunder, such Compound shall no longer be included in the rights licensed by one Party to the other Party under Section 2.1 or 2.2, provided, however, that for so long as either (a) there is at least one Development Candidate being studied hereunder during the Development Phase of the Research Program or (b) a Product is being marketed in the Field by AHPC pursuant to this Agreement, neither Party will develop or commercialize in the Field, independently or in collaboration with any Third Party, such Compound or any Derivative thereof without the prior written consent of the other Party. 2.5 Direct Licenses to Party Affiliates. Either Party may at any time request and authorize the other Party to grant licenses directly to Affiliates of the requesting Party by giving written notice designating to whom a direct license is to be granted. Upon receipt of any such notice, the requested Party shall enter into and sign a separate direct license agreement with such designated Affiliate of the requesting Party. All such direct license agreements shall be consistent with the terms and conditions of this Agreement, except for such modifications as may be required by the laws and regulations in the country in which the direct license will be exercised. In countries where validity of the direct license agreement requires prior government approval or registration, such direct license agreement shall not become binding between the parties thereto until such approval or registration is granted, which approval or registration shall be obtained by the requesting Party. All costs of making a direct license under this Section 2.5 shall be borne by the requesting Party. 2.6 Exclusive Working Relationship. Notwithstanding the licenses granted under Sections 2.1 and 2.2 hereof, it is expressly understood and agreed by the Parties that (a) during the Screening Phase and the Screening Phase Tail, ViroPharma and its Affiliates shall work exclusively with AHPC and AHPC's Affiliates in the Screening, Research, Development and Commercialization of Compounds and pharmaceutical products for use in the Field, provided, however, that during the Screening Phase Tail, either Party and/or its Affiliates shall be free to continue the Screening of Tail Compounds either independently or exclusively with the other Party and the other Party's Affiliates, but not with any Third Party, (b) after the end of the Screening Phase Tail ViroPharma and its Affiliates shall be free to conduct Screening of Compounds (other than Compounds from the AHPC Chemical Library or to which AHPC otherwise has proprietary rights) against Targets that are not Active Collaboration Targets and, provided that such Compounds are not active against any Active Collaboration Target, ViroPharma and its Affiliates shall be free to conduct Research, Development and Commercialization with respect to such Compounds, (c) during the Research Program, AHPC and its Affiliates shall work exclusively with ViroPharma and its Affiliates on the development of Compounds which are directed against Active Collaboration Targets, and (d) during the term of this Agreement, neither Party nor its Affiliates shall develop or commercialize any Active Compound for use outside of the Field, except in collaboration with the other Party and such other Party's Affiliates pursuant to an agreement to be negotiated by the Parties. Notwithstanding the foregoing, once a Compound has ceased to be an Active Compound, the Parties and their respective Affiliates shall be free to develop and/or commercialize such Compound for use outside of the Field, provided, however, that with respect to such Compound, as of the time such Compound ceases to be an Active Compound, AHPC and its Affiliates shall have no further rights or licenses under the ViroPharma Technology and ViroPharma and its Affiliates shall have no further rights or licenses under the AHPC Technology. For the sake of clarity, AHPC would have no obligation to work exclusively with ViroPharma (i) with respect to any Biomolecule based pharmaceutical products regardless of the Target of such product, (ii) with respect to Small Molecules based pharmaceutical products directed against Targets that are not, at such time, Active Collaboration Targets, and (iii) during the Development Phase, with respect to Small Molecule based pharmaceutical products directed against Targets for which no Small Molecule based pharmaceutical product is then being Developed under this Agreement. 2.7 Right of Reference. Each Party hereby grants the other a "Right of Reference," as that term is defined in 21 C.F.R. (S) 314.3(b), to any data developed under this Agreement, and a Party shall provide a signed statement to this effect, if requested by the other, in accordance with 21 C.F.R. (S) 314.50(g)(3). 3. MANAGEMENT OF COLLABORATION. 3.1 Joint Steering Committee. 3.1.1 Formation; Membership. Within thirty (30) days after the Effective Date, ViroPharma and AHPC shall establish a Joint Steering Committee (the "JSC") to oversee and control the collaborative discovery and preclinical and clinical development of Compounds and Products for use in the Field, as further described below in this Agreement. The JSC shall be composed of an equal number of from two (2) to four (4) representatives from each Party as appointed by such Party, which representatives shall have expertise suitable to the then-current activities of the collaboration. The JSC shall initially have two (2) representatives from each Party, but the JSC may change its size from time to time by mutual consent of its members, provided, however, that the size of the JSC shall be no less than four (4) members and no greater than eight (8) members. A Party may replace one or more of its representatives from time to time upon written notice to the other Party. From time to time, the JSC may establish subcommittees to oversee specific projects or activities and such subcommittees shall be constituted as the JSC shall determine, but shall always include at least one (1) member from each Party. The JSC will exist until the termination of the Research Program, as set out in Section 4.3, unless the Parties otherwise agree in writing. 3.1.2 Chairperson; Secretary. The chairperson of the JSC shall be designated by AHPC. The chairperson will be responsible for scheduling meetings of the JSC, preparing agendas for meetings, sending to all JSC members notices of all regular meetings and agendas for such meetings at least five (5) business days before such meetings. The chairperson shall appoint a secretary for each meeting who will record the minutes of the meeting, circulate copies of meeting minutes to the Parties and each JSC member promptly following the meeting for review, comment and approval and finalize approved meeting minutes. 3.1.3 Meetings. The JSC shall meet at least once each Calendar Quarter during the term of the Research Program, unless otherwise mutually agreed by the Parties. Either Party may call a special meeting of the JSC on fifteen (15) days written notice to the other Party and each of the JSC members. Such written notice shall include an agenda for the special meeting. Meetings, including, without limitation, special meetings, of the JSC will alternate between the offices of the Parties, unless otherwise agreed by the members of the JSC, or may be held telephonically or by video-conference. Meetings of the JSC shall be effective only if at least one (1) representative of each Party is in attendance or participating in the meeting. Members of the JSC shall have the right to participate in and vote at meetings by telephone. The most senior attending representative of each Party on the JSC shall have the right to vote on behalf of any members of the JSC from such Party not attending a JSC meeting in person or by telephone. Each Party shall be responsible for expenses incurred by its employees and its members of the JSC in attending or otherwise participating in JSC meetings. 3.1.4 Decision Making. All decisions of the JSC shall be made by majority vote. ************ 3.1.5 Responsibilities of the JSC. In addition to its general responsibility to oversee and coordinate the development of Compounds and Products in the Field according to the Global Research and Development Plan and ensure a regular flow of research and development information between the Parties, the JSC shall in particular: (a) develop the Global Research and Development Plan and the Annual Development Plan and Budget for the remainder of calendar year 1999 and for calendar year 2000 within sixty (60) days after the Effective Date; (b) review and update as necessary the Global Research and Development Plan and develop an Annual Development Plan and Budget for activities under the Global Research and Development Plan for subsequent calendar years no later than the October 31 immediately preceding each such subsequent calendar year; (c) oversee the activities of each Party's project team that is performing such Party's obligations under the Research Program; (d) facilitate the flow of information between the Parties with respect to all development work being conducted for each Compound and Product in the Field on a worldwide basis; (e) review and approve all scientific and clinical protocols, which shall provide that all preclinical and clinical development work under this Agreement shall be conducted in accordance with GLPs and GCPs; (f) review and approve the contents and filing of INDs, applications for Regulatory Approval, and related and supporting submissions to Regulatory Authorities; and (g) until such time as the MSC is formed, review and approve premarketing activities and expenses. 3.2 Marketing Steering Committee. 3.2.1 Formation; Membership. As soon as agreed by the JSC, but not later than thirty (30) days after the initiation of the first Phase III Clinical Study of a Product, ViroPharma and AHPC shall establish a Marketing Steering Committee (the "MSC") to develop and coordinate a Copromotion Territory Commercialization Plan and Annual Commercialization Plans and Budgets and to oversee the execution of each Party's responsibilities in the Copromotion Territory under the Copromotion Territory Commercialization Plan and the applicable Annual Commercialization Plan and Budget. The MSC shall be composed of an equal number of from two (2) to four (4) representatives from each Party as appointed by such Party, which representatives shall have expertise suitable to the then-current activities of the collaboration. The MSC shall initially have two (2) representatives from each Party, but the MSC may change its size from time to time by mutual consent of its members, provided, however, that the size of the MSC shall be no less than four (4) members and no greater than eight (8) members. A Party may replace one or more of its representatives from time to time upon written notice to the other Party. From time to time, the MSC may establish subcommittees to oversee specific projects or activities and such subcommittees shall be constituted as the MSC shall determine, but shall always include at least one (1) member from each Party. The MSC will exist for so long as a Product is Promoted by both of the Parties in the Copromotion Territory pursuant to this Agreement unless otherwise agreed, in writing, by the Parties. 3.2.2 Chairperson; Secretary. The chairperson of the MSC shall be designated by AHPC. The chairperson will be responsible for scheduling meetings of the MSC, preparing agendas for meetings, sending to all MSC members notices of all regular meetings and agendas for such meetings at least five (5) business days before such meetings. The chairperson shall appoint a secretary for each meeting who will record the minutes of the meeting, circulate copies of meeting minutes to the Parties and each MSC member promptly following the meeting for review, comment and approval and finalize approved meeting minutes. 3.2.3 Meetings. After the MSC is formed in accordance with Section 3.2.1, the MSC shall meet at least once each Calendar Quarter, unless otherwise mutually agreed by the Parties. Either Party may call a special meeting of the MSC on fifteen (15) days written notice to the other Party and each of the MSC members. Such written notice shall include an agenda for the special meeting. Meetings, including, without limitation, special meetings, of the MSC will alternate between the offices of the Parties, unless otherwise agreed by the members of the MSC, or may be held telephonically or by video-conference. Meetings of the MSC shall be effective only if at least one (1) representative of each Party is in attendance or participating in the meeting. Members of the MSC shall have the right to participate in and vote at meetings by telephone. The most senior attending representative of each Party on the MSC shall have the right to vote on behalf of any members of the MSC from such Party not attending a MSC meeting in person or by telephone. Each Party shall be responsible for expenses incurred by its employees and its members of the MSC in attending or otherwise participating in MSC meetings. 3.2.4 Decision Making. All decisions of the MSC shall be made by majority vote *******************. 3.2.5 Responsibilities of the MSC. In addition to its general responsibility to oversee and coordinate the Commercialization of Products in the Copromotion Territory according to the Copromotion Territory Commercialization Plan, the MSC shall in particular: (a) not later than sixty (60) days after the filing of the first application for Regulatory Approval of a Product in the Copromotion Territory, complete and approve a Copromotion Territory Commercialization Plan for such Product and an Annual Commercialization Plan and Budget for such Product covering the period through the end of the first full calendar year after anticipated Regulatory Approval; (b) oversee and coordinate the activities of the Parties in marketing, selling and distributing Products in the Copromotion Territory during the Term of this Agreement following Regulatory Approval of such Products in the Copromotion Territory; and (c) not later than September 30 of each year after formation of the MSC establish an Annual Commercialization Plan and Budget describing each of the Parties' Commercialization activities and forecast the expected sales level of Products each in the Copromotion Territory during the following calendar year, which will guide the schedule of production of Products. 3.3 Executive Steering Committee. 3.3.1 Formation; Membership. Within thirty (30) days after the Effective Date, ViroPharma and AHPC shall establish an Executive Steering Committee (the "ESC") to resolve disputes arising within the JSC and the MSC. The ESC shall be composed of two (2) representatives appointed by each of ViroPharma and AHPC, provided, however, that no such representative is also a member of either the JSC or the MSC. A Party may replace one (1) or more of its representatives from time to time upon written notice to the other Party. The ESC shall exist until the expiration or earlier termination of this Agreement. 3.3.2 Chairperson; Secretary. The chairperson of the ESC shall be designated by AHPC. The chairperson will be responsible for scheduling meetings of the ESC, preparing agendas for meetings, sending to all ESC members notices of all regular meetings and agendas for such meetings at least five (5) business days before such meetings. The chairperson shall appoint a secretary for each meeting who will record the minutes of the meeting, circulate copies of meeting minutes to the Parties and each ESC member promptly following the meeting for review, comment and approval and finalize approved meeting minutes. 3.3.3 Meetings. The ESC shall meet on an as needed basis, provided, however, that the ESC shall meet and decide on each matter presented to it within thirty (30) calendar days after each such matter is referred to it by the JSC or the MSC, as applicable. A matter shall be considered referred to the ESC as of the date that either Party provides each member of the ESC with a written description of the disputed matter, which written description shall include the positions taken by each member of the JSC or MSC, as applicable, as to such matter, all other information relevant to such matter and a copy of the minutes of each JSC or MSC meeting, as applicable, at which such matter was discussed. Within ten (10) days after such matter is so presented to the ESC, the chairman of the ESC shall notify each member of the ESC of the date, time and location of the ESC meeting to address such matter. The meetings of the ESC will alternate between the offices of the Parties, unless otherwise agreed by the members of the ESC, or may be held telephonically or by video-conference. Meetings of the ESC shall be effective only if at least one (1) representative of each Party is in attendance or participating in the meeting. An attending or participating representative of a Party shall have the right to vote on behalf of non-attending or non-participating member from such Party. Each Party shall be responsible for expenses incurred by its employees and its members of the ESC in attending or otherwise participating in ESC meetings. 3.3.4 Decision Making. All decisions of the ESC shall be made by majority vote ************. 3.3.5 Dispute Resolution. If the ESC is unable to reach a decision with respect to any matter, such matter shall be referred for resolution ***********. The decision **************** with respect to such matter pursuant to this Section 3.3.5 shall be final and binding upon each of the Parties. Notwithstanding the foregoing, if an unresolved matter is presented *************** for resolution as provided in this Section 3.3.5, ***************** refer the matter back to the ESC or the JSC, as applicable, for further consideration with a specified date by which the ESC or JSC, as applicable, must either resolve the matter or resubmit the matter ************* for final resolution. 3.4 Authority. The Parties agree that, in voting on matters as described in this Article 3, it shall be conclusively presumed that each voting member of the JSC, MSC and ESC has the authority and approval of such member's respective senior management in casting his or her vote and decisions of the JSC, MSC and ESC made in accordance with this Article 3 shall be binding upon each of the Parties. 3.5 Project Coordinators. Each Party shall designate one or two of its employees as project coordinator(s) for all of the activities contemplated under this Agreement. Such project coordinators will be responsible for the day-to-day coordination of the collaboration contemplated by this Agreement and will serve to facilitate communication between the Parties. A Party may, from time to time, replace its designated project coordinator(s) upon providing the other Party with written notice to that effect. 4. RESEARCH AND DEVELOPMENT. 4.1 The Research Program. 4.1.1 General. Under the terms and conditions set forth herein, AHPC and ViroPharma will collaborate in the conduct of a collaborative research program for the (i) identification and validation of Targets and assay and screening methods utilizing such Targets and (ii) the discovery, identification, screening, and pre-clinical and clinical development of Compounds and Products for use in the Field (collectively, the "Research Program"). The Research Program shall consist of a Screening Phase, a Screening Phase Tail, if applicable, and with respect to any Compound identified by the JSC as a Hit during the Screening Phase, a Research Phase and, if warranted, a Development Phase. The Screening Phase of the Research Program (the "Screening Phase") will be focused on the development of Targets, assays and Screening methods and the Screening of the ViroPharma Chemical Library, the AHPC Chemical Library and any other library selected by mutual agreement of the Parties for the identification and validation of Hits. The Research Phase of the Research Program (the "Research Phase") will be focused on a medicinal chemistry program for the further evaluation of Hits, the development and validation of Lead Compound candidates, including, without limitation, Derivatives of Hits, screening and testing of Lead Compound candidates to identify and validate Lead Compounds, the optimization of Lead Compounds and their Derivatives, further preclinical Research and Screening of Lead Compounds to identify and select Development Candidates, and the further preclinical Development of Development Candidates. The Development Phase of the Research Program (the "Development Phase") will be focused on the clinical Development of Development Candidates and Products. 4.2 Research & Development Plans. 4.2.1 Global Research and Development Plan. Within thirty (30) days following its formation, the JSC shall prepare and approve a global research and development plan (the "Global Research and Development Plan"). The Global Research and Development Plan shall consist of those tasks that the Parties agree are essential to the validation of Targets, the discovery, validation and preclinical and clinical development of Compounds and Products for use in the Field, and obtaining Regulatory Approval for Products in the world. The Global Research and Development Plan shall be kept current by the JSC, updated on such schedule as the JSC may determine but not less often than once per calendar year. The Global Research & Development Plan may only be modified or amended upon written approval of the JSC. 4.2.2 Annual Development Plans. Within thirty (30) days following its formation, the JSC shall prepare and approve an annual development plan and budget (the "Annual Development Plan and Budget") addressing the collaborative Screening, Research and Development activities to be carried out by the Parties during the remainder of calendar year 1999 pursuant to this Agreement and the Global Research and Development Plan. Thereafter, on or before October 31 of each year, the JSC shall prepare and approve an Annual Development Plan and Budget addressing the collaborative Screening, Research and Development activities to be undertaken by the Parties during the following calendar year pursuant to this Agreement and the then current Global Research and Development Plan. Each Annual Development Plan and Budget shall include, without limitation, detailed plans for the characterization and validation of Targets, the discovery and validation of Compounds for use in the Field, the collaborative research and development of Compounds and Products for use in the Field, designation of which Party is responsible for each task, staffing levels required to carry out such activities, and a budget setting forth the estimated expenditures required to carry out such activities. The Annual Development Plan and Budget may only be modified or amended upon written approval of the JSC. 4.3 Term of Research Program. The Research Program shall extend until the termination of the latest of all of the following, including, if applicable, the last meeting of the JSC necessary to determine whether Hits in the Screening Phase Tail should be advanced to Development. 4.3.1 Screening Phase. The Screening Phase of the Research Program shall begin on the Effective Date and, on a Collaboration Target by Collaboration Target basis, unless extended in accordance with this Section 4.3.1, shall extend until the three (3) year anniversary of the Effective Date (the "Initial Term of the Screening Phase") unless this Agreement is earlier terminated in its entirety in accordance with Sections 11.4, 11.5, or 11.9.1 or with respect to such Collaboration Target in accordance with Section 11.7. The Initial Term of the Screening Phase of the Research Program may be extended by mutual agreement of the Parties on terms substantially the same as those set forth herein, unless otherwise agreed in writing by the Parties. On or before the day one hundred eighty (180) days before the expiration of the Initial Term of the Screening Phase of the Research Program or the then current extension thereof, as applicable, either Party may provide to the other Party written notice of its desire to extend the Screening Phase of the Research Program by one (1) additional year. Promptly after the other Party's receipt of such written notice the Parties shall commence discussions of the need and desire to extend the Screening Phase of the Research Program and if both Parties do not agree, in writing, to such extension on or before the day sixty (60) days before the expiration of the Initial Term of the Screening Phase or the then current extension thereof, the Term of the Screening Phase shall expire at the end of the Initial Term of the Screening Phase or the then current extension thereof, as applicable. 4.3.2 Research Phase. The Research Phase of the Research Program shall commence, on a Compound by Compound basis, upon the JSC's designation of such Compound as a Hit, and shall extend until the later of (a) the initiation of the Development Phase for such Compound, or (b) such time as the JSC determines, in writing, to discontinue all Research on such Compound and not to advance such Compound to the Development Phase, unless earlier terminated in accordance with Sections 11.4, 11.5, 11.7 or 11.9.1. 4.3.3 Screening Phase Tail. The Screening Phase Tail shall begin during the term of this Agreement, on a Compound-by-Compound basis, when such Compound is first screened and found by either Party to have any activity against any Collaboration Target, whether or not such Compound is determined to be a Hit (a "Tail Compound"), and shall extend until the two (2) year anniversary of the end of the Term of the Screening Phase, unless this Agreement is earlier terminated in its entirety in accordance with Section 11.4 or 11.9.1 or pursuant to Section 11.7, with respect to any Collaboration Target identified pursuant to Section 11.7(b) for which the Research Program has been terminated in accordance with Section 11.7, but regardless of whether this Agreement is earlier terminated in accordance with Section 11.5. Within ten (10) business days after the end of each Calendar Quarter during the Screening Phase Tail each Party shall provide to the other a written report detailing all data and information obtained by such Party with respect to any Tail Compound studied by such Party during such Calendar Quarter. For the Calendar Quarter during which the Screening Phase Tail ends, such written reports shall be provided within ten (10) business days after the last day of the Screening Phase Tail. At any time during the Screening Phase Tail, either Party may propose in writing to the JSC that a Tail Compound subject to the Screening Phase Tail be designated a Hit or Lead Compound and be further developed. Additionally, within thirty (30) days after the last day of the Screening Phase Tail, the JSC shall meet to determine whether any of the Tail Compounds studied by the Parties during the Screening Phase Tail shall be designated as a Hit or Lead Compound and further developed. If the JSC designates a Tail Compound as a Hit or Lead Compound, then the Parties shall collaborate on further, Research, Development and Commercialization of such Compound consistent with the terms of this Agreement, regardless of whether this Agreement is earlier terminated in accordance with Section 11.5, in which event, such earlier termination shall be void and the effects of any such termination arising in accordance with Section 11.5.2 shall be reversed such that each Party thereafter has the rights it had immediately prior to such termination. If the JSC in good faith determines not to designate any such Tail Compound as a Hit or a Lead Compound, then the Party owning such Compound may further Develop and Commercialize such Compound independently of the other Party subject to the restrictions of Section 2.6. 4.3.4 Development Phase. With respect to any Compound, the Development Phase shall commence on the date an IND is filed seeking permission from the appropriate Regulatory Authority(ies) to conduct clinical studies of such Compound and shall continue until the JSC agrees to cease the clinical development of such Compound or until a Product containing such Compound has received Regulatory Approval in the Copromotion Territory and each country of the AHPC Territory where AHPC determines to apply for Regulatory Approval. 4.4 Selection of Additional Targets, Biomolecules, Hits, Lead Compounds, Development Candidates and Products. 4.4.1 Selection of Additional Targets. During the Screening Phase, the JSC may select one or more additional Targets as Collaboration Targets against which to Screen Compounds for activity. Likewise, during the term of the Screening Program, the JSC may determine to discontinue Screening Compounds for activity against one or more Targets or to reinstate the screening of Compounds for activity against one or more Targets that were previously discontinued from Screening. 4.4.2 Selection of Biomolecules as Compounds. Neither Party shall Screen or conduct any Research or Development under this Agreement on any Compound that is a Biomolecule unless the JSC first approves, in writing, the inclusion of such Biomolecule as a Compound under this Agreement. 4.4.3 Selection of Hits. The JSC shall review the data obtained by the Parties in the Screening of Compounds, and, upon agreement that such data support a determination that such Compound has activity against the applicable Collaboration Target that meets or exceeds an active threshold established by the JSC for that Collaboration Target, such Compound shall be deemed to be a Hit. 4.4.4 Selection of Lead Compounds. Based on criteria to be determined by the JSC, the JSC may select Lead Compounds during the Screening Phase, the Screening Phase Tail or the Research Phase from (a) Hits in the ViroPharma Chemical Library, the AHPC Chemical Library or any other library the Parties shall mutually agree to screen in connection with the Research Program, and/or (b) any Derivative of any such Hits. 4.4.5 Selection of Development Candidates. During the Research Phase, the JSC may select Development Candidates from those Compounds designated by the JSC as Lead Compounds and any Derivatives thereof. The JSC's selection of Development Candidates shall be based upon the JSC's determination to develop such Compound toward IND filing, based on criteria established by the JSC, which criteria may include, without limitation, consideration of the following factors: in vitro efficacy and potency, in vivo oral activity, efficacy and potency, medicinal chemistry criteria, toxicology studies required for IND filing, ancillary pharmacology studies, clinical drug substance stability and formulation, scale up compound synthesis and other competitive and commercial factors, including without limitation, the proprietary position of such Compound. 4.4.6 Selection of Products. Development Candidates will become Products upon the filing of an IND for such Development Candidate, which filing will be made only after the JSC determines that such Development Candidate is suitable for clinical trials based on its preclinical profile and competitive and other commercial considerations. 4.5 Conduct of the Research Program. ViroPharma and AHPC shall each use its respective Commercially Reasonable Efforts to perform its obligations under the Research Program in accordance with the Global Research and Development Plan and the then current Annual Development Plan and Budget and each Party shall perform such obligations in accordance with applicable GLPs and GCPs. All activities to be undertaken in the performance of the Research Program shall be carried out by employees of the Parties and/or their respective Affiliates, provided, however, that if either Party is able to reasonably demonstrate, and the JSC agrees, that it would be in the best interests of both Parties to contract with one (1) or more Third Parties to perform certain tasks under the Research Program, the Party responsible for such task may enter into a contract with a Third Party to perform such task, which contract shall be subject to the prior written approval of the JSC. In determining whether to utilize the services of any Third Party in conducting activities under the Research Program, the Parties shall consider, inter alia, what would be the most efficient and cost-effective means for accomplishing the proposed activity, any relevant intellectual property issues that may impede a Third Party's ability to perform the proposed activity or that may warrant limiting the performance of the proposed activity to one of the Parties, and other relevant factors. The responsibility for performing clinical studies of each Product will be assigned to AHPC and/or Third Party contractors selected by the JSC in accordance with this Section 4.5. Notwithstanding the foregoing, ViroPharma shall be given the opportunity to perform three (3) clinical studies in the Development of Products in the Copromotion Territory under this Agreement, which clinical studies shall consist of one (1) Phase I Clinical Study, one (1) Phase II Clinical Study and one (1) Phase III Clinical Study ******************. Within thirty (30) days of the JSC's deciding that a clinical study on a Product is warranted, *****************. If the JSC agrees, in writing, such agreement not to be unreasonably withheld, ***********************, the Annual Development Plan and Budget for the calendar year in which such clinical study is to take place shall assign responsibility for such clinical study to ViroPharma, or be amended to reflect such assignment of responsibility. ****************************** Notwithstanding the foregoing, the JSC may assign to ViroPharma responsibility for conducting additional clinical trials beyond the three (3) described above in this Section 4.5. 4.6 Funding of the Research Program. 4.6.1 Pre-Development Expenses. The Parties shall share the Pre- Development Expenses *****************************. 4.6.2 Development Expenses. The Parties shall share the Development Expenses, on a Product by Product basis, as follows: (a) AHPC shall be responsible for *************** and ViroPharma shall be responsible for ****************** of the Development Expenses incurred by either Party. (b) Expenses incurred by the Parties for the continued development of a Product in a country of the Copromotion Territory (i.e., for Phase IV clinical studies, studies supporting approval of additional indications or labeling changes or other post-marketing studies) will be treated as Post-Approval Research and Regulatory Expenses pursuant to Section 6.1.8(c). 4.6.3 Payment of Expenses; R&D Accounts. Subject to reconciliation as provided in Section 4.6.5, each Party shall be responsible and pay for the expenses incurred by it in performing its obligations under the Research Program. Subject to the limitations set forth in Section 4.6.4, each Party shall charge all such expenses so incurred by it or its Affiliates to a separate account created by such Party on its books and records solely for the purpose of tracking expenses incurred in connection with the Research Program (each, a "R&D Account"). Within thirty (30) days after the end of each Calendar Quarter, each Party shall submit to the other Party a written summary of all expenses charged to its R&D Account during such Calendar Quarter, which summary shall be accompanied by reasonable supporting documentation for such expenses. 4.6.4 Expense Limitations. The expenses charged by either Party to its R&D Account in accordance with Section 4.6.3, shall not be in an amount in excess of ************* of the amount included for such expenses in the then current Annual Development Plan and Budget unless the JSC recommends and the respective R&D management of each Party approves such excess expenses. Additionally, the Parties hereby agree that efforts of the employees of a Party or its Affiliates in performing its obligations under the Research Program shall be charged to such Party's R&D Account at the rate of *******************, or such other amount as may be agreed to from time to time in writing by the Parties, for efforts in support of preclinical studies of a Compound or otherwise performed in the Screening Phase or the Research Phase of the Research Program and ***********************, or such other amount as may be agreed to from time to time in writing by the Parties, for efforts in support of clinical studies of a Compound or Product or otherwise performed as part of the Development Phase of the Research Program, provided, however, that only those efforts that are contemplated by the Global Research and Development Plan and/or the applicable Annual Development Plan and Budget shall be chargeable by a Party to its R&D Account, except as otherwise approved in writing by the JSC. All payments made by a Party to a Third Party in connection with the performance of its obligations under the Research Program shall be charged to such Party's R&D Account at such Party's actual out-of-pocket cost. Expenses incurred by each Party for equipment, materials and supplies utilized in performing its obligations under the Research Program shall not be separately charged to such Party's R&D Account, except for those expenses incurred by a Party, with the prior written consent of the JSC, in the purchase or making of equipment, materials or supplies (other than common laboratory supplies, e.g., pipettes, test tubes, petri dishes, reagents, and the like) that are to be used exclusively in connection with the performance of such Party's obligations under the Research Program (e.g., laboratory animals, compounds that are Development Candidates, Products, placebo supplies, etc.), which expenses shall be charged to such Party's R&D Account at such Party's actual out-of-pocket expense incurred in purchasing or making such equipment, materials or supplies. Notwithstanding the foregoing, in the case of materials supplied to the Parties by AHPC for use in clinical trials of Compounds or Products, AHPC shall charge to its R&D Account its Fully Absorbed Standard Cost for such materials, as adjusted to account for manufacturing cost variances allocable to such materials. 4.6.5 Reconciliation of Expenses. Within sixty (60) days after the end of each calendar year, AHPC shall prepare a reconciliation report, accompanied by reasonable supporting documents and calculations, which reconciles the amounts charged to each Party's R&D Account during such calendar year pursuant to Section 4.6.3, including, without limitation, making any necessary adjustments for prior period manufacturing cost variances allocable to Products utilized in Development, and the share of the Parties' aggregate Pre-Development Expenses and Development Expenses to be allocated to each of the Parties for such calendar year in accordance with Sections 4.6.1 and 4.6.2. Within thirty (30) days after AHPC delivers such reconciliation report to ViroPharma, the net amount shown as being due either AHPC or ViroPharma (the "R&D Shortfall") will be paid by the Party owing such amount, provided, however, that in the event ViroPharma is the Party owing such amount to AHPC, ViroPharma may, by written notice to AHPC provided within such thirty (30) day period, ************************************. If, with respect to any calendar year, ViroPharma has an R&D Shortfall for which it is to reimburse AHPC, the balance in the R&D Reimbursement Account has been exhausted, and ViroPharma is unable or otherwise fails to pay to AHPC all or part of the R&D Shortfall before the end of the thirty (30) day period required by this Section 4.6.5, then the unpaid portion of the R&D Shortfall (the "Deferred Payment") shall accumulate interest at the annual interest rate of twelve percent (12%), compounded monthly, and shall be repaid to AHPC ************************ *****, until all such R&D Shortfalls and any interest accrued thereon are paid in full. Notwithstanding the foregoing, all Deferred Payments and all interest accumulating thereon shall be due and payable to AHPC within seven (7) years after the end of the thirty (30) day period described above in this Section 4.6.5. The failure of ViroPharma to pay to AHPC all or part of an R&D Shortfall prior to the end of such seven (7) year period shall not be a material breach of this Agreement for purposes of Section 11.4. 4.6.6 Records and Audits. During the term of this Agreement, each Party shall keep and maintain accurate and complete records showing the expenses incurred by it in performing its obligations under the Research Program during the three (3) preceding calendar years, which books and records shall be in sufficient detail such that each such expense can be (i) allocated as a Pre-Development Expense or a Development Expense and (ii) in the case of Development Expenses, allocated to particular clinical trials or activities such that each Party's responsibility for such expenses as provided in Section 4.6.2 can accurately be determined. Upon fifteen (15) days prior written notice from a Party (the "Auditing Party"), the other Party (the "Audited Party") shall permit an independent certified public accounting firm of nationally recognized standing selected by the Auditing Party and reasonably acceptable to the Audited Party, to examine the relevant books and records of the Audited Party and its Affiliates as may be reasonably necessary to verify the reports submitted by the Audited Party in accordance with Section 4.6.3 and the accuracy of the reconciliation report prepared in accordance with Section 4.6.5. An examination by a Party under this Section 4.6.6 shall occur not more than once in any calendar year and shall be limited to the pertinent books and records for any calendar year ending not more than thirty-six (36) months before the date of the request. The accounting firm shall be provided access to such books and records at the Audited Party's facility(ies) where such books and records are normally kept and such examination shall be conducted during the Audited Party's normal business hours. The Audited Party may require the accounting firm to sign a standard non-disclosure agreement before providing the accounting firm access to the Audited Party's facilities or records. Upon completion of the audit, the accounting firm shall provide both AHPC and ViroPharma a written report disclosing whether the reports submitted by the Audited Party are correct or incorrect and the specific details concerning any discrepancies. No other information shall be provided to the Auditing Party. If the accountant determines that, based on errors in the reports so submitted, the reconciliation report prepared in accordance with Section 4.6.5 is incorrect, the Parties shall promptly revise the reconciliation report and any additional amount owed by one Party to the other shall be paid within thirty days after receipt of the accountant's report, along with interest at the annual interest rate of twelve percent (12%), compounded monthly from the date that such additional amount should have first been paid, provided, however, that no such interest shall be payable if the errors leading to the reconciliation report being incorrect were in the reports provided by the Party to receive such additional amount. Additionally, if the accountant determines that the reports submitted by the Audited Party overstate the Audited Party's expenses by more than ten percent (10%), the Audited Party shall reimburse the Auditing Party for the expenses incurred by the Auditing Party in conducting the audit. 4.7 Reporting and Disclosure. 4.7.1 Reports. Before each quarterly meeting of the JSC, ViroPharma and AHPC will each provide the other with written copies of all materials they intend to present at the JSC meeting plus, to the extent not set forth in the JSC materials, a written report summarizing any other material data and information arising out of the conduct of the Research Program. If after receipt of any such report, either Party shall request additional data or information relating to Research Program data or Collaboration Technology licensed hereunder, the Party to whom such request is made shall promptly provide to the other Party such data or information that such Party reasonably believes is necessary for the continued conduct of the Research Program. 4.7.2 Quarterly Meeting. At the quarterly meeting of the JSC, AHPC and ViroPharma will review in reasonable detail (i) all data and information generated in the conduct of the Research Program by each Party, and (ii) all Collaboration Technology licensed hereunder developed by the Parties. 4.7.3 Disclosure. During the term of the Research Program, the Parties will promptly disclose to one another all data, information, Inventions, techniques and discoveries (whether patentable or not) arising out of the conduct of the Research Program and all Inventions, techniques and discoveries (whether patentable or not) included in Collaboration Technology licensed hereunder. 5. MANUFACTURING OF PRODUCTS; REGULATORY MATTERS. 5.1 Manufacturing. Pursuant to the licenses granted to AHPC in Section 2, AHPC shall have the exclusive right to manufacture, either itself and/or through Third Parties selected by AHPC, Products under the Agreement. To the extent possible, AHPC shall notify ViroPharma at least one (1) year before any anticipated occurrence of the inability of AHPC to supply one hundred fifteen percent (115%) of the commercial demands for Product in the Co-Promotion Territory as forecast by the MSC. Within fifteen (15) days of such notice the MSC shall meet to discuss the need to identify and obtain a secondary source of Product supply to avoid or reduce the effect of any shortage. Additionally, after the First Commercial Sale of a Product in the Copromotion Territory, AHPC shall, by December 1 of each year, provide ViroPharma with an estimate of AHPC's expected Fully Absorbed Standard Cost for manufacturing the full estimated commercial needs for such Product for sale in the Copromotion Territory for the upcoming calendar year. AHPC shall provide ViroPharma with an updated estimate from time to time if an unexpected event occurs that significantly raises or lowers the last estimate that AHPC provided to ViroPharma. 5.2 Labeling. To the extent permitted by applicable laws and regulations, as may be reasonably requested by ViroPharma, AHPC shall include in all Product Labels, Labeling, and Packaging, as those terms are use in the FD&C Act, a statement indicating that such Product was developed in collaboration with ViroPharma. 5.3 Regulatory Approvals. AHPC shall file, in its own name, all applications for Regulatory Approval for Products in the Copromotion Territory and in those countries of the AHPC Territory where AHPC, in its sole discretion, determines it is commercially advantageous to do so. AHPC shall have the primary responsibility for communicating with any Regulatory Authority regarding any application for Regulatory Approval or any Regulatory Approval once granted, provided, however, that ViroPharma shall, upon AHPC's request, and at ViroPharma's expense, (a) provide AHPC with advice and reasonable assistance in (i) developing a Regulatory Approval filing strategy for Products, (ii) reviewing study reports from clinical trials of Products, (iii) preparing applications for Regulatory Approval for Products, (iv) preparing supplements to applications for Regulatory Approval for Products, (v) responding to questions from Regulatory Authorities regarding applications for Regulatory Approval or any supplement thereto and (b) participate in interactions with Regulatory Authorities concerning the Products. 5.4 Regulatory Reporting. AHPC shall be responsible for filing all reports required to be filed in order to maintain any Regulatory Approvals granted for Products in the world, including, without limitation, adverse drug experience reports. ViroPharma shall cooperate with AHPC in preparing and filing all such reports and, upon AHPC's request, provide AHPC with any information in ViroPharma's possession or Control which AHPC reasonably deems to be relevant to any such reports. Notwithstanding the foregoing, to the extent ViroPharma has or receives any information regarding any adverse drug experience which may be related to the use of any Product, ViroPharma shall promptly provide AHPC with all such information in accordance with the Adverse Event Reporting Procedures (as may be amended from time to time upon mutual agreement of the Parties) set forth in Exhibit 5.4 attached hereto. Expenses (both internal expenses and out-pocket costs paid to a Third Party) incurred by a Party in performing its regulatory reporting obligations under this Section 5.4 in connection with Regulatory Approvals in the Copromotion Territory shall be charged by such Party to such Party's Marketing Account for such Product as a Post-Approval Research and Regulatory Expense. AHPC shall be solely responsible for expenses incurred by it in performing its regulatory reporting obligations under this Section 5.4 in connection with Regulatory Approvals in the AHPC Territory. 6. COMMERCIALIZATION OF PRODUCTS. 6.1 Commercialization in the Copromotion Territory. 6.1.1 Principles of Copromotion. Pursuant to the licenses granted to AHPC in Section 2, AHPC shall have the exclusive right to Commercialize each Product in the Field in the Copromotion Territory during the term of this Agreement. Notwithstanding the foregoing, ViroPharma, subject to this Section 6.1 and Section 11.6, shall have the right to Promote each Product, jointly with AHPC, in the Copromotion Territory, using professional sales representatives that are full time employees of ViroPharma or that are employees of Contract Sales Organizations ("CSOs"). The Parties' marketing activities shall comply with the terms of this Agreement and the Copromotion Territory Commercialization Plan. 6.1.2 Commercialization Plan. On a Product by Product basis, not later than sixty (60) days after the filing of the first application for Regulatory Approval of a Product in the Copromotion Territory, the MSC shall prepare and approve a rolling multiyear (not less than three (3) years) plan for Commercializing such Product in the Copromotion Territory (the "Copromotion Territory Commercialization Plan"), which plan includes a comprehensive market development, marketing, sales, supply and distribution strategy for such Product in the Copromotion Territory. The Copromotion Territory Commercialization Plan shall be updated by the MSC at least once each calendar year such that it addresses no less than the three (3) upcoming years. Not later than thirty (30) days after the filing of the first application for Regulatory Approval of a Product in the Copromotion Territory and thereafter on or before September 30 of each calendar year, the MSC shall prepare an annual commercialization plan and budget (the "Annual Commercialization Plan and Budget"), which plan is based on the then current Copromotion Territory Commercialization Plan and includes a comprehensive market development, marketing, sales, supply and distribution strategy, including an overall budget for anticipated marketing, promotion and sales efforts in the upcoming calendar year (the first such Annual Development Plan and Budget shall cover the remainder of the calendar year in which such Product is anticipated to be approved plus the first full calendar year thereafter). The Annual Commercialization Plan and Budget will specify which Target Markets and distribution channels each Party shall devote its respective Promotion efforts towards, the personnel and other resources to be devoted by each Party to such efforts, the number and positioning of Details to be performed by each Party, as well as market and sales forecasts and related operating expenses, for the Product in each country of the Copromotion Territory, and budgets for projected Pre-Marketing Expenses, Sales and Marketing Expenses and Post-Approval Research and Regulatory Expenses. In preparing and updating the Copromotion Territory Commercialization Plan and each Annual Commercialization Plan and Budget, the MSC will take into consideration factors such as market conditions, regulatory issues and competition. 6.1.3 Allocation of Target Markets; Sales Effort. On a Product by Product basis, at least ninety (90) days before the launch of such Product in a country of the Copromotion Territory and thereafter, at least ninety (90) days before the beginning of each calendar year, the MSC *********** in such country and ************** on the following criteria and conditions: (a) each ********* in each country of the Copromotion Territory shall, as much as is reasonably possible, *********** for such Product expected to be made in such country of the Copromotion Territory in accordance with the ************ for the Promotion of such Product in such country; (b) the inclusion of ************; (c) AHPC's aggregate ***********; and (d) the MSC may not, without the prior written consent of the President of ViroPharma, ***********. The number of Details assigned to a Party by the MSC in accordance with this Section 6.1.3 shall be such Party's *************. 6.1.4 Incremental Sales Force Effort. If a Party is asked by the MSC to deliver more sales force effort than that which is agreed by the Parties to be more than a 50/50 selling effort in any Calendar Quarter, and if such Party provides such increased sales force effort (the "Incremental Sales Force Effort"), such Party shall be entitled to charge the cost of the Incremental Sales Force Effort to such Party's Marketing Account as an Incremental Sales Force Effort Expense. The cost to be so charged shall be at a rate approved by the MSC at the time such Incremental Sales Force Effort is requested and shall be on a cost per Detail basis. If AHPC is the Party providing the Incremental Sales Force Effort, AHPC shall be reimbursed for its Incremental Sales Force Expense by deducting the Incremental Sales Force Expense incurred for such Calendar Quarter from the Net Sales of such Product sold during such Calendar Quarter prior to the allocation of Net Profits for such Calendar Quarter. If ViroPharma is the Party providing the Incremental Sales Force Effort, AHPC shall reimburse ViroPharma for its Incremental Sales Force Expense by deducting such Incremental Sales Force Expense from the Net Sales of such Product sold during such Calendar Quarter prior to the allocation of Net Products for such Calendar Quarter and distributing such deducted amount to ViroPharma simultaneously with the distribution of Net Profits to ViroPharma for such Calendar Quarter. The Party incurring the Incremental Sales Force Expense shall report the same to the other Party as part of the reports submitted under Section 6.1.8(d). 6.1.5 Extra Effort. If a Party expends more effort than originally required of it by the Copromotion Territory Commercialization Plan in order to perform Details that were part of the other Party's Assigned Sales Force Effort, and that the other Party fails to perform and which additional effort is approved in advance by the MSC ("Extra Effort"), the first Party shall be entitled to charge the costs of the Extra Effort ("Extra Effort Expense") to its Marketing Account on a cost per Detail basis consistent with Section 6.1.8(d), as well as twelve percent (12%) annual interest, compounded monthly, accrued on the amount charged for the period in which the Extra Effort is expended. If AHPC is the Party providing the Extra Effort, AHPC shall be reimbursed for its Extra Effort Expense by deducting the Extra Effort Expense incurred for such Calendar Quarter from the Net Sales of such Product sold during such Calendar Quarter before the allocation of Net Profits for such Calendar Quarter. If ViroPharma is the Party providing the Extra Effort, AHPC shall reimburse ViroPharma for its Extra Effort Expense by deducting such Extra Effort Expense from the Net Sales of such Product sold during such Calendar Quarter before the allocation of Net Products for such Calendar Quarter and distributing such deducted amount to ViroPharma simultaneously with the distribution of Net Profits to ViroPharma for such Calendar Quarter. The Party incurring the Extra Effort Expense shall report the same to the other Party as part of the reports submitted under Section 6.1.8(d). 6.1.6 Performance Metrics. The ********** or as part of any ************ shall be determined according to Detail reporting mechanisms and methodology that are approved and applied consistently by the MSC. 6.1.7 Sales and Distribution; Recalls. During the term of this Agreement, AHPC shall be responsible for: (a) distribution of all Products in the Copromotion Territory hereunder, the booking of all sales with respect to such Products and the performance of related services. If ViroPharma receives any order for the Product in the Copromotion Territory during the term of this Agreement, it shall promptly refer such orders to AHPC. (b) handling and implementing all recalls and market withdrawals of any Product in the Copromotion Territory. ViroPharma will make available to AHPC, upon request, all of ViroPharma's pertinent records that AHPC may reasonably request to assist it in effecting any recall or market withdrawals. Except as expressly otherwise provided below in this Section 6.1.7(b), the Parties shall share equally all other costs of a recall or marketing withdrawal of a Product in the Co-Promotion Territory. Notwithstanding the foregoing, a Party shall bear any and all costs of a recall or market withdrawal of a Product in the Co-Promotion Territory to the extent such recall or market withdrawal results from a negligent act or omission or intentional misconduct on the part of such Party, including, without limitation, the breach of any of such Party's warranties under Sections 10.3(d) or 10.3(e) hereof, and not from a negligent act or omission or intentional misconduct on the part of the other Party. A Party shall have no obligation to reimburse or otherwise compensate the other Party for any lost profits or income that may arise in connection with any such recall or market withdrawal. (c) handling all aspects of order processing, invoicing and collection, inventory and receivables. (d) providing customer support, including handling medical queries, and performing other functions consistent with consumer practice for pharmaceutical products consistent with the then current Copromotion Territory Commercialization Plan and the applicable Annual Commercialization Plan and Budget. 6.1.8 Commercialization Expenses. (a) Pre-Marketing Expenses. On a Product by Product and country by country basis, before Regulatory Approval of such Product in such country of the Copromotion Territory, the Pre- Marketing Expenses incurred by the Parties with respect to such Product in anticipation of obtaining Regulatory Approval of such Product in such country shall ***************. As such Pre-Marketing Expenses are incurred they shall be paid for by the Party incurring such expenses, subject to reimbursement as set forth in Section 6.1.8(g). (b) Sales and Marketing Expenses. On a Product by Product and country by country basis, after Regulatory Approval of such Product in such country of the Copromotion Territory, the Sales and Marketing Expenses incurred by the Parties shall *********************. The costs of a Party's professional sales representatives and marketing personnel *********************. (c) Post-Approval Research and Regulatory Expenses. On a Product by Product and country by country basis, after Regulatory Approval of such Product in such country of the Copromotion Territory, the Post-Approval Research and Regulatory Expenses incurred by the Parties in connection with such Product in such country shall *********************. (d) Payment of Expenses; Marketing Accounts. Subject to reconciliation as provided in Sections 6.1.8(f) or 6.1.8(g), as applicable, *********************. Subject to the limitations set forth in Section 6.1.8(e), each Party shall charge all such expenses so incurred by it or its Affiliates to a separate account created by such Party on its books and records solely for the purpose of tracking expenses incurred in connection with the marketing, Promotion, distribution and sale of Products in the Copromotion Territory (each, a "Marketing Account"). Within thirty (30) days after the end of each Calendar Quarter, each Party shall submit to the other Party a written summary of all Pre-Marketing Expenses, Sales and Marketing Expenses, Post-Approval Research and Regulatory Expenses, Incremental Sales Force Expenses and Extra Effort Expenses incurred by it in performing its obligations in connection with the marketing, Promotion, distribution and sale of Products in the Copromotion Territory, charged to its Marketing Account during such Calendar Quarter, which summary shall be accompanied by reasonable supporting documentation for such expenses. (e) Expense Limitations. The Pre-Marketing Expenses, Sales and Marketing Expenses and Post-Approval Research and Regulatory Expenses charged by either Party to its Marketing Account in accordance with this Section 6.1.8, shall not be in amount in excess of *********************of the amount included for such expenses in the then current Annual Commercialization Plan and Budget, unless the MSC approves such excess expenses. All payments made by a Party to any Third Party in connection with the performance of its obligations in connection with the Commercialization of a Product in the Copromotion Territory shall be charged to such Party's Marketing Account at such Party's actual out-of-pocket cost incurred in accordance with the MSC approved contract entered into with such Third Party. (f) Reconciliation of Pre-Marketing Expenses. Within sixty (60) days after the end of each Calendar Quarter, AHPC shall prepare a reconciliation report, accompanied by reasonable supporting documentation and calculations, which reconciles the Pre- Marketing Expenses charged to each Party's Marketing Account during such Calendar Quarter pursuant to this Section 6.1.8 and the share of the Parties' aggregate Pre-Marketing Expenses to be allocated to each of the Parties for such Calendar Quarter in accordance with this Section 6.1.8. Within thirty (30) days after AHPC delivers such reconciliation report to ViroPharma, *********************. If, with respect to any Calendar Quarter, ViroPharma has a Pre-Marketing Expense Shortfall for which it is to reimburse AHPC and ViroPharma is unable or otherwise fails to pay to AHPC all or part of the Pre-Marketing Expense Shortfall before the end of the thirty (30) day period required by this Section 6.1.8(f), the unpaid portion of the Pre- Marketing Shortfall would accumulate interest at the annual interest rate of twelve percent (12%), compounded monthly, and would be combined with any R&D Shortfall and repaid to AHPC in accordance with Section 4.6.5. (g) Reimbursement of Sales and Marketing Expenses and Post- Approval Research and Regulatory Expenses. At the time AHPC, pursuant to Section 7.6.3, distributes to ViroPharma, ViroPharma's share of Net Profits obtained from the sale of a Product in a country of the Copromotion Territory during any Calendar Quarter, AHPC shall also reimburse each of AHPC and ViroPharma for those Sales and Marketing Expenses, Post- Approval Research and Regulatory Expenses, Incremental Sales Force Effort Expenses, and Extra Effort Expenses that are (i) directly allocable to the Commercialization of such Product in such country during such Calendar Quarter (ii) properly charged by such Party to its Marketing Account and (iii) reported to the other Party in accordance with this Section 6.1.8. Such reimbursements shall be made solely from revenues obtained by AHPC which are attributable to the Net Sales of such Product in such country of the Copromotion Territory, *********************. If the Net Sales ********************* shall be carried over on such Party's Marketing Account into subsequent Calendar Quarters *********************. 6.1.9 Marketing and Promotional Materials. The MSC shall determine the content, quantity and method of distribution of any promotional materials related to the Product in the Copromotion Territory, provided, however, that all such marketing and promotional materials shall be subject to the approval of AHPC's and ViroPharma's legal, medical affairs, marketing and regulatory affairs department before any use thereof by either Party. AHPC will be responsible for preparing and duplicating such marketing and promotional materials and shall provide reasonable quantities of the same to ViroPharma for use by ViroPharma in connection with its Promotion of the Product in the Copromotion Territory hereunder. Each Party shall use only marketing and promotional materials approved by the MSC and provided by AHPC. All copyright and other intellectual property rights in said promotional materials shall remain vested in AHPC. Neither Party may not independently create, distribute or use sales, promotion or other similar material relating to a Product in the Copromotion Territory without the prior written consent of either the MSC or the other Party. 6.1.10 Promotional Claims. Each Party shall limit the claims of safety and efficacy that such Party or its sales force makes for a Product in the Copromotion Territory to those that are consistent with the approved labeling for such Product in such country of the Copromotion Territory. Neither Party may add, delete or modify claims of efficacy or safety in its Promotion of any Product in the Copromotion Territory nor make any changes in Promotion materials and literature approved by the MSC. Each Party's Detailing and Promotion of a Product in the Copromotion Territory shall be in strict adherence to all regulatory, professional and legal requirements including, without limitation, FDA's regulations and guidelines concerning the advertising of prescription drug products, the American Medical Association's Guidelines on Gifts to Physicians, the PhRMA Guidelines for Marketing Practices, the ACCME Standards for Commercial Support of Continuing Medical Education, the then current Copromotion Territory Commercialization Plan for the Product and any updates thereto. 6.1.11 Samples. When Detailing and Sampling the Product, each Party's professional sales representative shall complete Sample Receipt Forms provided by AHPC. A copy of the completed Sample Receipt Forms shall be left with the Physician receiving the Detail. Such professional sales representative shall mail to AHPC, in pre- addressed, postage-paid envelopes provided by AHPC, at the close of each business day the original completed Sample Receipt Forms for all Details performed by such professional sales representative that day. A copy of all such Sample Receipt Forms shall be kept by each such professional sales representative. Each Party shall ensure that each of its professional sales representatives fills out the Sample Receipt Forms accurately, completely and timely. The Fully-Absorbed Standard Cost incurred by AHPC in providing and processing Sample Receipt forms shall be charged by AHPC to its Marketing Account as a Sales and Marketing Expense. 6.1.12 Communications. Each Party shall be fully responsible for disseminating accurate information regarding a Product to its professional sales representatives based on the Product's approved labeling and information provided by the MSC. 6.1.13 Training. Each Party shall be responsible for the training of its own professional sales representatives, in accordance with the training requirements and training programs and using training materials approved by the MSC and shall require each of its professional sales representatives to attend sales training for a Product before their Promotion of such Product in the Copromotion Territory hereunder. After the initial training meeting, each Party shall periodically provide additional training, in accordance with the training requirements and training programs and using training materials approved by the MSC, to each of its professional sales representatives Promoting Products hereunder. At the discretion and upon approval of the MSC, any such training meetings may be held jointly by the Parties. The expenses incurred by each Party in training its professional sales representatives before the launch of a Product shall be charged to such Party's Marketing Account as a Pre-Marketing Expense. The expenses incurred by each Party in training its professional sales representatives after the launch of a Product shall be charged to such Party's Marketing Account as a Sales and Marketing Expense. 6.1.14 Compliance. In connection with its Promotion of the Product in the Copromotion Territory, each Party shall comply and shall cause each of its employees, representatives and agents, including, without limitation, each of its professional sales representatives, to comply with all laws and regulations of the Copromotion Territory and shall do nothing which such Party knows or reasonably should know would jeopardize the goodwill or reputation of either Party or the reputation of any Product. 6.1.15 Generic Product. On a Product by Product and country by country (within the Copromotion Territory) basis, no later than three (3) years before the expiration of the last to expire of the Patent Rights conferring market exclusivity for such Product in such country of the Copromotion Territory, the Parties will determine by mutual agreement after good faith discussions whether to jointly launch a generic version of such Product in the Copromotion Territory and what the terms and conditions regarding such Product will be. If the Parties, on or before such time, are unable to agree to jointly launch such a generic Product in such country, then upon expiration of the relevant Patent Rights in such country, and notwithstanding any other exclusive or non- exclusive license granted under this Agreement, each Party shall have the right and license to utilize the Collaboration Technology and the other Party's Know-How solely to the extent necessary to launch and Commercialize its own generic version of such Product in such country and thereafter shall have no further obligations to the other Party with respect to such generic Product. 6.2 Commercialization in the AHPC Territory. AHPC shall have the sole right, either directly or through its Affiliates, sublicensees and/or distributors, to market, distribute and sell Products in the AHPC Territory. AHPC shall use its Commercially Reasonable Efforts to sell each Product in those countries of the AHPC Territory for which AHPC has obtained Regulatory Approval for such Product. AHPC shall be responsible for all marketing and selling expenses for the sale of Products in the AHPC Territory and AHPC shall have the sole right and discretion to determine the price of Products sold in the AHPC Territory and to make all other business decisions concerning the Commercialization of Products in the AHPC Territory. 7. CONSIDERATION; PROFIT SHARING. 7.1 Research Program Expense Reimbursements. AHPC agrees to provide ViroPharma *********************************: (a) AHPC shall pay a nonrefundable fee of five million dollars ($5,000,000.00) to ViroPharma on the first business day after the Effective Date in consideration of ViroPharma's agreement to participate in the JSC, including the preparation, updating and implementation of the Global Research and Development Plan and the Annual Development Plans and Budgets; and (b) AHPC shall reimburse ViroPharma for up to ************** of ViroPharma's *****************. AHPC shall create on its books and records an ***************** for this purpose, which ****************, but shall be subject to adjustment, from time to time, 7.2 Additional Development Expense Payments. AHPC shall pay to ViroPharma the following additional development expense payments, each such payment being due and payable within thirty (30) days after the occurrence of the corresponding event: ************************************. 7.2 *************************. Each of the additional development expense payments set forth above shall be payable one time only **********************, except in the case of the additional development expense payments payable for *******************, which additional development expense payments shall be payable with respect to ********************, provided, however, that, with respect to any Product that ****************, the receipt of *************, shall not result in ****************. If, with respect to any Product, any of the above events ************ does not occur because the JSC determines that ***************, such event will be deemed to have occurred on the date the JSC makes such a determination for purposes of determining *********************. Additionally, if certain of the above stated events occur ***************, if such later events occur in connection with the subsequent Development of another Product hereunder, ******************. For example, *************************. 7.3 Purchase of Equity. On the Effective Date, AHPC and ViroPharma shall enter into the Stock Purchase Agreement attached to this Agreement as Exhibit 7.3, pursuant to which AHPC shall purchase, and ViroPharma will sell to AHPC, shares of the capital stock of ViroPharma on the terms and conditions set forth therein. 7.4 Royalties. 7.4.1 Royalty Rates. In consideration for the licenses granted to AHPC under Section 2.1 hereof, AHPC, on a Product by Product and calendar year by calendar year basis, will pay to ViroPharma royalties based on Net Sales obtained by AHPC or its Affiliates from the sale of such Product in the AHPC Territory, which royalties shall be calculated as follows: royalty = A + B + C, where: A = either (i) for **************** of the portion of AHPC's and its Affiliates' Net Sales obtained from the sale of such **************** in the AHPC Territory (excluding Net Sales obtained from the sale of such Product in any countries where the obligation to pay royalties under this Section 7.4.1 has expired in accordance with Section 7.4.3 with respect to such Product), which, during the calendar year in question are less than or equal ******************, or (ii) for ************ of the portion of AHPC's and its Affiliates' Net Sales obtained from the sale of such **************** in the AHPC Territory (excluding Net Sales obtained from the sale of such Product in any countries where the obligation to pay royalties with under this Section 7.4.1 has expired in accordance with Section 7.4.3 with respect to such Product) which, during the calendar year in question are less than or equal to **************; B = either (i) for ************ of the portion of AHPC's and its Affiliates' Net Sales obtained from the sale of such **************** in the AHPC Territory (excluding Net Sales obtained from the sale of such Product in any countries where the obligation to pay royalties with under this Section 7.4.1 has expired in accordance with Section 7.4.3 with respect to such Product), which, during the calendar year in question are greater than ************ and less than or equal to *****************, or (ii) for ************* of the portion of AHPC's and its Affiliates' Net Sales obtained from the sale of such **************** in the AHPC Territory (excluding Net Sales obtained from the sale of such Product in any countries where the obligation to pay royalties with under this Section 7.4.1 has expired in accordance with Section 7.4.3 with respect to such Product), which, during the calendar year in question are greater *******************; and C = either (i) for ************ of the portion of AHPC's and its Affiliates' Net Sales obtained from the sale of such **************** in the AHPC Territory (excluding Net Sales obtained from the sale of such Product in any countries where the obligation to pay royalties with under this Section 7.4.1 has expired in accordance with Section 7.4.3 with respect to such Product), which, during the calendar year in question are greater than ***************** or (ii) for ****************of the portion of AHPC's and its Affiliates' Net Sales obtained from the sale of such **************** in the AHPC Territory (excluding Net Sales obtained from the sale of such Product in any countries where the obligation to pay royalties with under this Section 7.4.1 has expired in accordance with Section 7.4.3 with respect to such Product), which, during the calendar year in question are greater than *******************************. ViroPharma acknowledges and agrees that nothing in this Agreement (including, without limitation, any exhibits or attachments hereto) shall be construed as representing an estimate or projection of either (i) the number of Class A Products and/or Class B Products that will or may be successfully developed and/or commercialized or (ii) anticipated sales or the actual value of the ViroPharma Technology, and Compound or any Product and that the figures set forth in this Section 7.4 or elsewhere in this Agreement or that have otherwise been discussed by the Parties are merely intended to define AHPC's royalty obligations to ViroPharma in the event such sales performance is achieved. AHPC MAKES NO REPRESENTATION OR WARRANTY, EITHER EXPRESS OR IMPLIED, THAT IT WILL BE ABLE TO SUCCESSFULLY DEVELOP AND/OR COMMERCIALIZE ANY PRODUCT OR, IF COMMERCIALIZED THAT ANY IT WILL ACHIEVE ANY PARTICULAR SALES LEVEL OF SUCH PRODUCT(S). 7.4.2 Royalty Adjustments. For each Product sold in each country of the AHPC Territory in each Calendar Quarter, the royalties payable to ViroPharma, pursuant to Section 7.4.1 and/or, if applicable, Section 11.5 or 11.6, for the Net Sales of such Product in such country during such Calendar Quarter may be reduced as set forth below, provided, however, that in no event will such royalties in any country be reduced by more than ************* by reason of the adjustments set forth below: (a) Unpatented Products. If in a given Calendar Quarter during the Full Royalty Rate Period, neither of Section 1.49(a) or (b) continues to be true because one or more of Valid Claims are invalidated in such country, the royalties payable to ViroPharma, pursuant to Section 7.4.1 and/or, if applicable, Section 11.5 or 11.6, for the Net Sales of such Product in such country during such Calendar Quarter shall be reduced to ********** of the applicable marginal rate set forth in Section 7.4.1 and/or, if applicable, Section 11.5 or 11.6. To calculate such reduced royalty amount in such countries, Net Sales will be allocated among the royalty increments in Sections 7.4.1, 11.5 and/or 11.6, as applicable, based on *******************. (b) Competition. If Competition (as defined below in this Section 7.4.2 (b)) exists during a given Calendar Quarter with respect to a Product in any country, the royalties payable to ViroPharma, pursuant to Section 7.4.1 and/or, if applicable, Section 11.5 or 11.6, for the Net Sales of such Product in such country during such Calendar Quarter shall be reduced to ************* of the applicable marginal rate set forth in Section 7.4.1 and/or, if applicable, Section 11.5 or 11.6. To calculate such reduced royalty amount when Competition exists in such countries, Net Sales will be allocated among the royalty increments in Sections 7.4.1, 11.5 and/or 11.6, as applicable, based on the **************. For purposes of this Section 7.4.2(b), Competition shall be deemed to exist if, during the applicable Calendar Quarter, on a Product by Product and country by country basis, (i) one or more Third Parties is selling a pharmaceutical product for use in the Field containing as an active ingredient, the Compound that is an active ingredient in the Product being sold by or on behalf of AHPC, its Affiliates or sublicensees in such country; and (ii) the sales of such competing products (measured on a unit basis) accounts for ******** or more of the total market in such country. The total market in such country shall be the sum of (x) the number of units of the affected Product sold by AHPC, its Affiliates or sublicensees in such country during such Calendar Quarter and (y) the number of units of competing products sold by parties other than AHPC, its Affiliates or sublicensees in such country during such Calendar Quarter. 7.4.3 Term of Royalty. The royalties payable pursuant to Section 7.4.1 and, if applicable, pursuant to Section 11.5 or 11.6, as adjusted pursuant to Section 7.4.2, will be payable on a country by country and Product by Product basis during the Full Royalty Rate Period. During the Reduced Royalty Rate Period for a Product, AHPC shall have an exclusive license, except as otherwise provided under this Agreement, to use the ViroPharma Know-How in the Field and ViroPharma's interest in any Collaboration Know-How in the Field, to make, have made, use, import, offer to sell and sell such Product in such country. In consideration of such license, AHPC shall pay to ViroPharma a royalty in the amount of three percent (3%) of the Net Sales obtained from the sale by AHPC and its Affiliates of such Product in such country, which royalty shall be payable only for sales made during the Reduced Royalty Rate Period. On a country by country basis, upon expiration of the Reduced Royalty Rate Period, the license granted to AHPC with respect to such country under this Section 7.4.3 shall continue to be a perpetual license which thereafter shall become irrevocable, fully- paid and royalty-free license, exclusive except for the license granted pursuant to Section 6.1.15. 7.5 Profit Split Payments. 7.5.1 Baseline Allocation of Profits. In consideration for ViroPharma's provision of services in connection with the Promotion of Products in the Copromotion Territory pursuant to Section 6.1, AHPC, on a country by country basis, shall pay to ViroPharma *********************of the Net Profits obtained from the sale of a Product in such country of the Co-Promotion Territory, which percentage may be adjusted from time to time in accordance with Section 7.5.3, (the most recently updated and adjusted allocation, ViroPharma's "Baseline Allocation of Net Profits") which payment shall be made to ViroPharma at the times and in the manner set forth in Section 7.6.3. AHPC shall retain the remaining portion of Net Profits (AHPC's "Baseline Allocation of Net Profits"). Notwithstanding the foregoing, in any Penalty Year, the allocation of Net Profits will be adjusted in accordance with Section 7.5.2. 7.5.2 Temporary Adjustments to Distribution of Profits. In a Penalty Year, each Party will be allocated a portion of Net Profits which allocation will be made based on the following formula: *************************** where ************************** 7.5.3 Permanent Adjustment to Baseline Allocation of Profits. If a Party incurs *****************, and the other Party incurs no Lapse Year during this period, then the Party incurring no Lapse Years may, at its discretion, impose a permanent change in the Baseline Allocation of Net Profits established in Section 7.5.1. The new Baseline Allocation of Profits shall be equivalent to the average proportion of Net Profits received by such Party during the *************** and shall become effective on January 1 of the year following the ****************. Examples of the calculation of the distribution of Net Profits during Penalty Years and the imposition of new baseline distributions are set forth in Exhibit 7.5.3. 7.5.4 Term of Profit Split Payments. With respect to a Product, AHPC, on a country by country basis in the Copromotion Territory, shall pay to ViroPharma a portion of Net Profits obtained from the sale of such Product in such country of the Copromotion Territory as set forth in Section 7.5.1 for so long as both Parties are Promoting such Product in such country pursuant to this Agreement. 7.6 Reports and Payments. 7.6.1 Cumulative Royalties. The obligation to pay royalties under this Agreement shall be imposed only once with respect to a single unit of a Product regardless of how many Valid Claims included within the Patent Rights would, but for this Agreement, be infringed by the manufacture, use, import, offer for sale or sale of such Product in the country of such manufacture, use or sale. 7.6.2 Royalty Statements and Payments. AHPC, within sixty (60) days after the end of each Calendar Quarter shall deliver to ViroPharma a report setting forth for such Calendar Quarter the following information, on a Product by Product basis, with respect to Products sold in the AHPC Territory, (a) the Net Sales of such Product in the AHPC Territory, (b) the basis for any adjustments to the royalty payable for the sale of such Product, and (c) the royalty due hereunder for the sale of such Product. No such reports shall be due for any Product before the First Commercial Sale of such Product in the AHPC Territory. The total royalty due for the sale of Products during such Calendar Quarter less any deductions made in accordance with Section 4.6.5 shall be remitted at the time such report is made. 7.6.3 Net Profit Statements and Payments. (a) Estimated Statements. Within the later of (i) thirty (30) days after the end of each Calendar Quarter or (ii) fifteen (15) days beyond the date on which AHPC receives from ViroPharma the report required under Section 6.1.8(d) with respect to such Calendar Quarter, AHPC shall deliver to ViroPharma a report setting forth the following estimated information with respect to Products sold in the Copromotion Territory during such Calendar Quarter: (i) the Net Sales of such Product in each country of the Copromotion Territory, (ii) the Net Profits obtained from the sale of such Product in each country of the Copromotion Territory, (iii) the deductions made from Net Sales in calculating such Net Profits, including, without limitation, the computation of Cost of Goods Manufacture for Sale, each Party's Sales and Marketing Expenses, Incremental Sales Force Expenses, if any, Extra Effort Expenses, if any, and Post-Approval Research and Regulatory Expenses, and (iv) the amount of Net Profits to be allocated to each Party, including an explanation of any deviation from the Baseline Allocation of Net Profits made in accordance with Section 7.5.1. No such reports shall be due with respect to any Product before the First Commercial Sale of such Product in the Copromotion Territory. (b) Actual Statements. After the First Commercial Sale of a Product in the Copromotion Territory, AHPC, within sixty (60) days after the end of each Calendar Quarter, shall deliver to ViroPharma a report setting forth for such Calendar Quarter the following information, on a Product by Product and Country by Country basis: (i) the Net Sales of such Product in each country of the Copromotion Territory, (ii) the Net Profits obtained from the sale of such Product in each country of the Copromotion Territory, (iii) the deductions made from Net Sales in calculating such Net Profits, including, without limitation, the computation of Cost of Goods Manufactured for Sale in such detail as AHPC customarily uses for its own internal reporting purposes, or as reasonably requested by ViroPharma, each Party's Sales and Marketing Expenses, Incremental Sales Force Expenses, if any, Extra Effort Expenses, if any, and Post-Approval Research and Regulatory Expenses, and (iv) the amount of Net Profits to be allocated to each Party, including an explanation of any deviation from the Baseline Allocation of Net Profits made in accordance with Section 7.5.1. No such reports shall be due with respect to any Product before the First Commercial Sale of such Product in the Copromotion Territory. At the time such report is made, AHPC shall remit to ViroPharma the amount of Net Profits allocated to ViroPharma for such Calendar Quarter less any deductions made in accordance with Section 4.6.5. 7.6.4 Taxes and Withholding. All payments under this Agreement will be made without any deduction or withholding for or on account of any tax unless such deduction or withholding is required by applicable laws or regulations. If the paying Party is so required to deduct or withhold such Party will (i) promptly notify the other Party of such requirement, (ii) pay to the relevant authorities the full amount required to be deducted or withheld promptly upon the earlier of determining that such deduction or withholding is required or receiving notice that such amount has been assessed against the other Party, (iii) promptly forward to the other Party an official receipt (or certified copy) or other documentation reasonably acceptable to the other Party evidencing such payment to such authorities. 7.6.5 Currency. All amounts payable and calculations hereunder shall be in United States dollars. As applicable, Net Sales, Net Profits and any expenses incurred by either Party shall be translated into United States dollars in accordance with AHPC's customary and usual translation procedures, consistently applied. If, due to restrictions or prohibitions imposed by national or international authority, payments cannot be made as provided in this Article 7, the Parties shall consult with a view to finding a prompt and acceptable solution, and AHPC will deal with such monies as ViroPharma may lawfully direct at no additional out-of-pocket expense to AHPC. Notwithstanding the foregoing, if payments arising in connection with the sale of Products in any country cannot be remitted to ViroPharma for any reason within six (6) months after the end of the Calendar Quarter during which they are earned, then AHPC shall be obligated to deposit the royalties in a bank account in such country in the name of ViroPharma. 7.7 Maintenance of Records; Audits. 7.7.1 Record Keeping for the Copromotion Territory. AHPC shall keep and maintain accurate and complete records in connection with the sale of Products in the Copromotion Territory hereunder and each Party shall keep and maintain accurate and complete records showing the expenses incurred and efforts employed by or on behalf of it or its Affiliates in Promoting Products in the Copromotion Territory hereunder, which books and records shall be in sufficient detail to permit the accurate determination of Net Sales, Net Profits (including, without limitation, the deduction of each Party's expenses from Net Profits pursuant to Section 1.70), and all other figures necessary for the verification of the allocation of Net Profits to be made under Section 7.5. Each Party shall maintain and cause its Affiliates to maintain such records for a period of at least three (3) years after the end of the calendar year in which they were generated. 7.7.2 Record Keeping for the AHPC Territory. AHPC shall keep and shall cause its Affiliates and sublicensees to keep accurate books and accounts of record in connection with the sale of Products in the AHPC Territory in sufficient detail to permit accurate determination of all figures necessary for verification of royalties to be paid hereunder. AHPC and its Affiliates and sublicensees shall maintain such records for a period of at least three (3) years after the end of the calendar year in which they were generated. 7.7.3 Audits. Upon thirty (30) days prior written notice from a Party (the "Auditing Party"), the other Party (the "Audited Party") shall permit an independent certified public accounting firm of nationally recognized standing selected by the Auditing Party and reasonably acceptable to the Audited Party, to examine, at the Auditing Party's sole expense, the relevant books and records of the Audited Party and its Affiliates as may be reasonably necessary to verify the accuracy of the reports submitted by the Audited Party in accordance with Section 7.6 and the calculation and allocation of Net Profits or the payment of royalties hereunder, as applicable. An examination by a Party under this Section 7.7.3 shall occur not more than once in any calendar year and shall be limited to the pertinent books and records for any calendar year ending not more than thirty-six (36) months before the date of the request. The accounting firm shall be provided access to such books and records at the Audited Party's facility(ies) where such books and records are normally kept and such examination shall be conducted during the Audited Party's normal business hours. The Audited Party may require the accounting firm to sign a standard non-disclosure agreement before providing the accounting firm access to the Audited Party's facilities or records. Upon completion of the audit, the accounting firm shall provide both AHPC and ViroPharma a written report disclosing whether the reports submitted by the Audited Party are correct or incorrect, whether the calculation and allocation of Net Profits are correct or incorrect, whether the royalties paid are correct or incorrect, and, in each case, the specific details concerning any discrepancies. No other information shall be provided to the Auditing Party. 7.7.4 Underpayments/Overpayments. If such accounting firm correctly concludes that additional Net Profits were due to ViroPharma or that additional royalties were due to ViroPharma, AHPC shall pay to ViroPharma the additional Net Profits or additional royalties, as applicable, together with any interest that may be due thereon as provided in Section 7.8 within thirty (30) days of the date AHPC receives such accountant's written report so correctly concluding. If such underpayment exceeds five percent (5%) of the Net Profits that were to be distributed to ViroPharma or the royalties that were to be paid to ViroPharma, as applicable, AHPC also shall reimburse ViroPharma for the out-of-pocket expenses incurred in conducting the audit, except in the event that such underpayment was due to any inaccurate information provided by ViroPharma to AHPC. If such accounting firm correctly concludes that additional Net Profits were to be allocated to AHPC (i.e., there was an overpayment in the distribution of Net Profits to ViroPharma) or that AHPC overpaid royalties to ViroPharma, ViroPharma will refund such overpayments to AHPC, together with any interest that may be due thereon as provided in Section 7.8, within thirty (30) days of the date ViroPharma receives such accountant's report so correctly concluding. If the amount of such overpayment that is due to any inaccurate information provided by ViroPharma to AHPC exceeds five percent (5%) of the Net Profits that were to be paid to ViroPharma or the royalties that were to be paid to ViroPharma, as applicable, ViroPharma also shall reimburse AHCP for any out-of-pocket expenses incurred by AHPC in conducting the audit. 7.7.5 Confidentiality. All financial information of a Party which is subject to review under this Section 7.7 shall be deemed to be Confidential Information subject to the provisions of Article 9, and such Confidential Information shall not be disclosed to any Third Party or used for any purpose other than verifying payments to be made by one Party to the other hereunder, provided, however, that such Confidential Information may be disclosed to Third Parties only to the extent necessary to enforce a Party's rights under this Agreement. 7.8 Interest. Any payment under this Article 7 that is more than forty- five (45) days past due shall thereafter be subject to interest at an annual percentage rate of twelve percent (12%). Likewise, any overpayment that is not refunded within forty-five (45) days after the date such overpayment was identified shall thereafter be subject to interest at an annual percentage rate of twelve percent (12%), provided, however, that if the overpayment is due to errors in reports provided by the overpaid Party, such interest shall accrue from the date the overpayment was made. 8. INTELLECTUAL PROPERTY. 8.1 Inventions. Subject to the provisions of Article 2, a Party shall own: (a) all of its Prior Inventions, (b) all of its Non-Collaboration Inventions, and (c) all Patent Rights claiming such Prior Inventions and Non-Collaboration Inventions. Also, subject to the provisions of Article 2, both Parties shall jointly own all Collaboration Inventions, Collaboration Patent Rights and Collaboration Know-How. All determinations of inventorship under this Agreement shall be made in accordance with United States patent law. 8.2 Patent Rights. 8.2.1 Prosecution and Maintenance of Patent Rights. (a) ViroPharma's Prior Inventions and Non-Collaboration Inventions. ViroPharma shall have the first right to prepare, file, prosecute and maintain, throughout the world, all Patent Rights claiming ViroPharma's Prior Inventions and Non-Collaboration Inventions. With respect to any ViroPharma Prior Invention or Non-Collaboration Invention that is applicable in the Field, ViroPharma shall give AHPC an opportunity to review and comment upon the text of the applications before filing, shall consult with AHPC with respect to such application, and shall supply AHPC with a copy of the applications as filed, together with notice of its filing date and serial number. ViroPharma shall keep AHPC advised of the status of the actual and prospective patent filings (including, without limitation, the grant of any Patent Rights that are applicable in the Field), and shall provide advance copies of any official correspondence related to the filing, prosecution and maintenance of such patent filings. If ViroPharma elects not to file a patent application or to cease the prosecution and/or maintenance of any Patent Right claiming a ViroPharma Prior Invention or Non-Collaboration Invention that relates to any Collaboration Target, any Active Compound and/or any Assay and Screening Technology and that is applicable in the Field, ViroPharma shall provide AHPC with written notice immediately upon the decision to not file or continue the prosecution of such patent application or maintenance of such patent and at least sixty (60) days before ceasing prosecution and/or maintenance of a particular Patent Right that is applicable in the Field and, in such case, shall permit AHPC, at AHPC's sole discretion, to file and/or continue prosecution and/or maintenance of such Patent Right on ViroPharma's behalf and at AHPC's own expense. If AHPC elects to continue prosecution or maintenance, ViroPharma shall execute such documents and perform such acts, at AHPC's expense, as may be reasonably necessary to permit AHPC to file, prosecute and/or maintain such Patent Rights. (b) AHPC's Prior Inventions and Non-Collaboration Inventions. AHPC, at its own expense, shall have the sole right to prepare, file, prosecute and maintain, throughout the world, all Patent Rights claiming any of AHPC's Prior Inventions and/or Non-Collaboration Inventions in countries and regions of the world of AHPC's choice. With respect to patent applications filed or to be filed in the Copromotion Territory claiming any AHPC Prior Invention or Non- Collaboration Invention that relates to any Active Compound and is applicable in the Field, AHPC shall give ViroPharma an opportunity to review and comment upon the text of such applications before filing, shall consult with ViroPharma with respect to such applications, and shall supply ViroPharma with a copy of such applications as filed, together with notice of its filing date and serial number. AHPC shall keep ViroPharma advised of the status of such actual and prospective patent filings (including, without limitation, the grant of any Patent Rights that are applicable in the Field), and shall provide advance copies of any official correspondence related to the filing, prosecution and maintenance of such patent filings. If AHPC elects not to file a patent application or to cease the prosecution and/or maintenance of any such Patent Right, AHPC shall provide ViroPharma with written notice immediately upon the decision to not file or continue the prosecution of such patent application or maintenance of such patent and at least sixty (60) days before ceasing prosecution and/or maintenance of a particular Patent Right that is applicable in the Field and, in such case, shall permit ViroPharma, at the ViroPharma's sole discretion, to file and/or continue prosecution and/or maintenance of such Patent Right on behalf of AHPC at ViroPharma's own expense. If ViroPharma elects to continue prosecution or maintenance, AHPC shall execute such documents and perform such acts, at ViroPharma's expense, as may be reasonably necessary to permit ViroPharma to file, prosecute and/or maintain such Patent Rights. (c) Collaboration Inventions. AHPC shall have the first right to prepare, file, prosecute and maintain any Patent Right claiming any Collaboration Invention throughout the world. AHPC shall give ViroPharma an opportunity to review the text of the applications before filing, shall consult with ViroPharma with respect thereto, and shall supply ViroPharma with a copy of the applications as filed, together with notice of its filing date and serial number. AHPC shall keep ViroPharma advised of the status of the actual and prospective patent filings (including, without limitation, the grant of any Patent Rights), and shall provide advance copies of any official correspondence related to the filing, prosecution and maintenance of such patent filings. ViroPharma shall reimburse AHPC for fifty percent (50%) of the costs incurred by AHPC in preparing, filing, prosecuting and maintaining such Patent Rights, which reimbursement will be made pursuant to invoices submitted by AHPC to ViroPharma no more often than once per Calendar Quarter. If either Party at any time declines to share in the costs of filing, prosecuting and maintaining any such Patent Right in the Field, on a country by country basis, such Party shall provide the other Party with thirty (30) days prior written notice to such effect, in which event, such Party shall (i) have no responsibility for any expenses incurred in connection with such Patent Right after the end of such thirty (30) day period and (ii) if the other Party elects to continue prosecution or maintenance, assign to the other Party all of its right, title and interest in and to such Patent Right and the underlying Collaboration Invention. If the other Party elects to continue prosecution or maintenance, the assigning Party shall execute such documents and perform such acts, at the receiving Party's expense, as may be reasonably necessary to effect an assignment of such Patent Rights to the receiving Party on a country by country basis and to allow the receiving Party to continue the prosecution and maintenance of such Patent Right. Any such assignment shall be completed in a timely manner to allow the receiving Party to continue such prosecution or maintenance. Upon the assignment of such Patent Right to the other Party, such Patent Right shall cease to be a Collaboration Patent Right on a country by country basis for purposes of this Agreement, and, thereafter shall be considered to be a Non- Collaboration Invention of the Party receiving such assignment for all purposes of this Agreement. 8.2.2 Enforcement of Patent Rights. (a) Notice and Discontinuance of Infringement - General. If either AHPC or ViroPharma becomes aware of any infringement, anywhere in the world, of any issued patent within the Patent Rights, it will notify the other Party in writing to that effect. Any such notice shall include evidence to support an allegation of infringement by such Third Party. The Party responsible for prosecuting and maintaining such Patent Right in accordance with Section 8.2.1 shall have the right, but not the obligation, to take action to obtain a discontinuance of such infringement or bring suit against the Third Party infringer within three (3) months from the date of said notice. ViroPharma shall bear all the expenses of any suit brought by it claiming infringement of any ViroPharma Patent Rights. AHPC shall bear all the expenses of any suit brought by it claiming infringement of any AHPC Patent Rights. Subject to Section 8.2.2(c), the Parties shall share equally the expenses of any suit brought by AHPC claiming infringement of any Collaboration Patent Rights. (b) AHPC Patent Rights and ViroPharma Patent Rights. With respect to suits claiming infringement of either the AHPC Patent Rights or the ViroPharma Patent Rights, the Party not bringing such suit (the "Non-Prosecuting Party") shall have the right, before commencement of the trial, suit or action brought by the other Party (the "Prosecuting Party"), to join any such suit or action, and in such event shall pay one-half of the costs of such suit or action. In no event shall the Prosecuting Party enter into any settlement, consent judgment or other voluntary final disposition of such suit which would adversely affect the Non-Prosecuting Party's rights under this Agreement in any way without first obtaining the Non-Prosecuting Party's written consent to do so, which consent shall not be unreasonably withheld. Additionally, if the Non-Prosecuting Party has joined in the action and shared in the costs thereof as set forth above, no settlement, consent judgment or other voluntary final disposition of the suit may be entered into without the consent of the Non-Prosecuting Party, which consent shall not be unreasonably withheld. If the Non-Prosecuting Party has not joined the suit or action, the Non-Prosecuting Party will reasonably cooperate with the Prosecuting Party in any such suit or action and shall have the right to consult with the Prosecuting Party and be represented by its own counsel at its own expense. Any recovery or damages derived from a suit in which the Non-Prosecuting Party has joined and shared costs shall be used first to reimburse each of the Prosecuting Party and the Non-Prosecuting Party for its respective documented out-of-pocket legal expenses relating to the suit, with any remaining amounts to be shared equally by the Parties. Any recovery or damages derived from a suit that the Non-Prosecuting Party has not joined shall be retained by the Prosecuting Party. (c) Collaboration Patent Rights. With respect to suits claiming infringement of the Collaboration Patent Rights, AHPC shall have the first right to bring suit claiming infringement of the Collaboration Patent Rights. ViroPharma shall have the right, before commencement of the trial, suit or action brought by AHPC, to join any such suit or action. In no event shall AHPC enter into any settlement, consent judgment or other voluntary final disposition of such suit which would adversely affect ViroPharma's rights under this Agreement in any way without first obtaining ViroPharma's written consent to do so, which consent shall not be unreasonably withheld. If AHPC declines to bring suit, ViroPharma may proceed with an infringement suit. Any recovery or damages derived from such a suit shall be used first to reimburse each of AHPC and ViroPharma for their respective documented out-of-pocket legal expenses relating to the suit, with any remaining amounts to be shared equally by the Parties. If either Party desires not to proceed with or participate in a suit against a Third Party for infringement of a Collaboration Patent Right, such Party may, by written notice to the other Party, elect not to share in the expenses of such suit. In such event, the Party continuing to prosecute the infringement action shall have the right, but not the obligation to bring or continue such suit at its own expense and shall be entitled to retain any recovery or damages derived from such suit, and the Party electing not to participate in the suit shall reasonably cooperate with such other Party in prosecuting such infringement action. The Party bringing such action shall incur no liability to the other Party as a consequence of such litigation or any unfavorable decision resulting therefrom, including any decision holding any of the Collaboration Patent Rights invalid or unenforceable. (d) Continuance of Infringement of the ViroPharma Patent Rights. With respect to the ViroPharma Patent Rights, if, after the expiration of the three (3) month period specified in Section 8.2.2(a), ViroPharma has not obtained a discontinuance of infringement of its Patent Rights, filed suit against any Third Party infringer of its Patent Rights, or provided AHPC with information and arguments demonstrating to AHPC's reasonable satisfaction that there is insufficient basis for the allegation of infringement of ViroPharma's Patent Rights, then AHPC shall have the right, but not the obligation, to bring suit against such infringer under the ViroPharma Patent Rights and to join ViroPharma as a party plaintiff, provided that AHPC shall bear all the expenses of such suit. ViroPharma will cooperate with AHPC in any suit for infringement of ViroPharma's Patent Rights brought by AHPC against a Third Party, and shall have the right to consult with AHPC and to participate in and be represented by independent counsel in such litigation at its own expense. AHPC shall incur no liability to ViroPharma as a consequence of such litigation or any unfavorable decision resulting therefrom, including any decision holding any of the ViroPharma Patent Rights invalid or unenforceable. (e) Continuance of Infringement of the AHPC Patent Rights. With respect to the AHPC Patent Rights in the Copromotion Territory which claim an Active Compound in the Field, if, after the expiration of the three (3) month period specified in Section 8.2.2(a), AHPC has not obtained a discontinuance of infringement of such Patent Rights in the Field, filed suit against any Third Party infringer of such Patent Rights, or provided ViroPharma with information and arguments demonstrating to ViroPharma's reasonable satisfaction that there is insufficient basis for the allegation of infringement of such Patent Rights in the Field, then ViroPharma shall have the right, but not the obligation, to bring suit against such infringer under such of the AHPC Patent Rights and to join AHPC as a party plaintiff, provided that ViroPharma shall bear all the expenses of such suit. AHPC will cooperate with ViroPharma in any suit for infringement of such of AHPC's Patent Rights brought by ViroPharma against a Third Party, and shall have the right to consult with ViroPharma and to participate in and be represented by independent counsel in such litigation at its own expense. ViroPharma shall incur no liability to AHPC as a consequence of such litigation or any unfavorable decision resulting therefrom, including any decision holding any of such AHPC Patent Rights invalid or unenforceable. 8.2.3 Infringement and Third Party Licenses. (a) Infringement of Third Party Patents - Course of Action. If the making, having made, importing, exporting, using, distributing, marketing, promoting, offering for sale or selling any Compound and/or Product in the Field, under this Agreement, is alleged by a Third Party to infringe a Third Party's patent, the Party becoming aware of such allegation shall promptly notify the other Party. Additionally, if either Party determines that, based upon the review of a Third Party's patent or patent application, it may be desirable to obtain a license from such Third Party with respect thereto so as to avoid any potential suit between either Party and such Third Party, such Party shall promptly notify the other Party of such determination. (b) AHPC Option to Negotiate. AHPC shall in the first instance have the right to negotiate with said Third Party for a suitable license or assignment, provided, however, that AHPC shall enter into no such agreement unless it has first obtained ViroPharma's approval of the terms of such agreement, including the amounts of any royalties or payments, which approval shall not be unreasonably withheld. If such negotiation results in a consummated agreement, AHPC shall make all payments to the Third Party and such payments shall be deemed Third Party License Fees for purposes of this Agreement. (c) Third Party Infringement Suit. If a Third Party sues a Party (the "Sued Party") alleging that the Sued Party's, the Sued Party's Affiliates' or the Sued Party's sublicensees' use of any Collaboration Target for the Screening of Compounds pursuant to this Agreement, or the Screening, Research, Development, or Commercialization of any Compound and/or Product in the Field during the term of and pursuant to this Agreement infringes or will infringe said Third Party's patent, then upon the Sued Party's request and in connection with the Sued Party's defense of any such Third Party infringement suit, the other Party shall provide reasonable assistance to the Sued Party for such defense. The Parties shall equally share in the litigation expenses, including settlement costs, royalties paid in settlement of any such suit, and the payment of any damages to the Third Party, other than Third Party License Fees paid pursuant to Section 8.2.3(e). The Party paying such expenses shall periodically, but no more than once per Calendar Quarter, invoice the other Party for its *********** share of expenses incurred, which invoices shall be accompanied by supporting documentation reasonably showing the expenses so incurred. Such invoices shall be paid within thirty (30) days of receipt, provided, however, that if AHPC is the Sued Party, ViroPharma has earned royalties pursuant to Section 7.4 or Net Profits pursuant to Section 7.5, and AHPC has invoiced ViroPharma for expenses under this Section 8.2.3(c) but ViroPharma has not yet paid them AHPC may deduct ViroPharma's ************* share of such expenses from such royalties or Net Profits due to ViroPharma. The obligation to share expenses pursuant to this Section 8.2.3(c) shall not apply to activities conducted by either Party: (a) with respect to any Collaboration Target after such Target has ceased to be a Collaboration Target pursuant to Section 4.4.1, (b) with respect to any Compound that has not been declared a Hit in accordance with Section 4.4.3, (c) with respect to any Hit, Lead Compound or Development Candidate after the JSC, in accordance with Section 4.4 and 2.4, has determined not to advance the development of such Hit, Lead Compound, or Development Candidate, or (d) after the expiration or any termination of this Agreement. (d) Other Third Party Licenses. If the Parties determine that, after consultation with intellectual property counsel, obtaining a license from a Third Party under such Third Party's intellectual property rights is necessary or useful for Screening, Research, Development or Commercialization of any Compound or Product under this Agreement, the JSC or the MSC shall determine which Party shall have the responsibility to negotiate and enter into an agreement with such Third Party for such a license. The Party entering into such agreement shall pay the Third Party License Fees due thereunder to such Third Party, subject to reimbursement in accordance with Section 8.2.3(e). (e) Third Party License Fees. ViroPharma shall be responsible for ************** of all Third Party License Fees paid by either Party pursuant to this Section 8.2.3 and AHPC shall be responsible for ***************** of all Third Party License Fees paid by either Party pursuant to this Sections 8.2.3. Notwithstanding the foregoing, if, pursuant to Section 8.2.3(d), AHPC determines it is necessary or desirable to obtain a license from a Third Party to allow the Screening, Research, Development and/or Commercialization of any Class A Compound or Product containing a Class A Compound, ***************. The Party paying such Third Party License Fees shall periodically invoice the other Party for its share of such Third Party License Fees, which invoices shall be submitted no more often than once per Calendar Quarter. The Party receiving such invoice shall reimburse the other Party for its share of such Third Party License Fees within forty-five (45) days after receiving the invoice therefor. 8.2.4 Patent Certifications. Each Party shall immediately give written notice to the other of any certification of which it becomes aware filed pursuant to 21 U.S.C. (S) 355(b)(2)(A), or (S) 355(j)(2)(A)(vii) (or any amendment or successor statute thereto) claiming that Patent Rights covering any Product are invalid or that infringement will not arise from the manufacture, use or sale of such Product by a Third Party. Notwithstanding any provision to the contrary, in the event that the Patent Rights at issue are owned and/or Controlled by ViroPharma and ViroPharma has failed to bring an infringement action against such Third Party at least fourteen (14) days prior to expiration of the forty five (45) day period set forth in 21 U.S.C. (S)355(c)(3)(C) (or any amendment or successor statute thereto), AHPC shall have the right to bring such an infringement action, in its sole discretion and at its own expense, in its own name and/or in the name of ViroPharma. At AHPC's request, ViroPharma shall, at its own expense, provide AHPC reasonable assistance to conduct such infringement action, including, without limitation, causing the execution of such legal documents as AHPC may deem necessary for the prosecution of such action. AHPC shall incur no liability to ViroPharma as a consequence of such litigation or any unfavorable decision resulting therefrom, including any decision holding any of the Patent Rights invalid or unenforceable. In the event that AHPC recovers any sums in such litigation by way of damages or in settlement thereof, AHPC shall have the right to retain all such sums to offset its costs, losses and expenses. 8.2.5 Patent Term Restoration. The Parties hereto shall cooperate with each other in obtaining patent term restoration or its equivalent in the world where applicable to Patent Rights. If elections with respect to obtaining such patent term restoration are to be made, the President, Wyeth-Ayerst Global Pharmaceuticals, and the President, ViroPharma Incorporated, or their designees, shall agree to an election and the Parties shall abide by such election. 8.3 Trademarks. AHPC shall, in its sole discretion, select and own all Trademarks, Product names and Compound names to be used in connection with the marketing, promotion and sale of any Product hereunder. ViroPharma shall neither use nor seek to register, anywhere in the world, any trademarks which are confusingly similar to any Trademark or any other trademarks, trade names, trade dress or logos used by or on behalf of AHPC, its Affiliates or sublicensees in connection with any Product. Nothing in this Section 8.3 shall prevent or limit ViroPharma in any way from continuing to use any trademark, trade name, trade dress or logo adopted by ViroPharma before the date that the same or a confusingly similar trademark, trade name, trade dress or logo is adopted by AHPC. 9. CONFIDENTIALITY. 9.1 Confidentiality. Except to the extent expressly authorized by this Agreement or otherwise agreed in writing, the Parties agree that, for the term of this Agreement and for five (5) years thereafter, each Party (the "Receiving Party"), receiving hereunder any Confidential Information of the other Party (the "Disclosing Party") shall keep such Confidential Information confidential and shall not publish or otherwise disclose or use such Confidential Information for any purpose other than as provided for in this Agreement except for Confidential Information that the Receiving Party can establish: (a) was already known to the Receiving Party (other than under an obligation of confidentiality), at the time of disclosure by the Disclosing Party and such Receiving Party has documentary evidence to that effect; (b) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the Receiving Party; (c) became generally available to the public or otherwise part of the public domain after its disclosure or development, as the case may be, and other than through any act or omission of a party in breach of this confidentiality obligation; (d) was disclosed to that Party, other than under an obligation of confidentiality, by a Third Party who had no obligation to the Disclosing Party not to disclose such information to others; (e) was independently discovered or developed by or on behalf of the Receiving Party without the use of the Confidential Information belonging to the other Party and the Receiving Party has documentary evidence to that effect. 9.2 Authorized Disclosure and Use. 9.2.1 Disclosure. Notwithstanding the foregoing Section 9.1, each Party may disclose Confidential Information belonging to the other Party to the extent such disclosure is reasonably necessary to: (a) file or prosecute patent applications claiming Inventions included within the Collaboration Technology, (b) prosecute or defend litigation, (c) exercise rights hereunder provided such disclosure is covered by terms of confidentiality similar to those set forth herein, and (d) comply with applicable governmental laws and regulations. In the event a Party shall deem it necessary to disclose pursuant to this Section 9.2.1, Confidential Information belonging to the other Party, the Disclosing Party shall to the extent possible give reasonable advance notice of such disclosure to the other Party and take reasonable measures to ensure confidential treatment of such information. 9.2.2 Use. Notwithstanding the foregoing Section 9.1, each Party shall have the right to use the other Party's Confidential Information in carrying out its respective responsibilities under this Agreement in both the conduct of the Research Program and the Development and Commercialization of Lead Compounds and Products. Similarly, subject to the license granted in Article 2 and the terms of this Article 9, each Party shall have the right to use the Joint Confidential Information for any purpose under this Agreement. 9.3 SEC Filings. Either Party may disclose the terms of this Agreement to the extent required, in the reasonable opinion of such Party's legal counsel, to comply with applicable laws, including without limitation the rules and regulations promulgated by the United States Securities and Exchange Commission (the "SEC"). Notwithstanding the foregoing, before disclosing this Agreement or any of the terms hereof pursuant to this Section 9.3, the Parties will consult with one another on the terms of this Agreement to be redacted in making any such disclosure. If a Party discloses this Agreement or any of the terms hereof in accordance with this Section 9.3, such Party agrees, at its own expense, to seek confidential treatment of portions of this Agreement or such terms, as may be reasonably requested by the other Party. 9.4 Publications. During the term of the Research Program, each Party will submit to the other Party for review and approval all proposed academic, scientific and medical publications and public presentations relating to the Research Program, Lead Compounds, Development Candidates, Products and/or Collaboration Technology for review in connection with preservation of exclusive Patent Rights and/or to determine whether Confidential Information should be modified or deleted. Written copies of such proposed publications and presentations shall be submitted to the nonpublishing Party no later than sixty (60) days before submission for publication or presentation and the non-publishing party shall provide its comments with respect to such publications and presentations within fifteen (15) business days of its receipt of such written copy. The review period may be extended for an additional thirty (30) days in the event the nonpublishing Party can demonstrate a reasonable need for such extension including, but not limited to, the preparation and filing of patent applications. By mutual agreement, this period may be further extended. ViroPharma and AHPC will each comply with standard academic practice regarding authorship of scientific publications and recognition of contribution of other parties in any publications relating to Research Program, Lead Compounds, Development Candidates, Products and/or Collaboration Technology. 9.5 Public Announcements. 9.5.1 Coordination. The Parties agree on the importance of coordinating their public announcements respecting this Agreement and the subject matter thereof (other than academic, scientific or medical publications that are subject to the publication provision set forth above). ViroPharma and AHPC will, from time to time, and at the request of the other Party discuss and agree on the general information content relating to this Agreement, the Research Program, Lead Compounds, Development Candidates, Products and/or Collaboration Technology which may be publicly disclosed. 9.5.2 Announcements. Except as may be expressly permitted under Sections 9.3 and 9.4, neither Party will make any public announcement regarding this Agreement, the Research Program, Lead Compounds, Development Candidates, Products and/or Collaboration Technology without the prior written approval of the other Party. 10. REPRESENTATIONS AND WARRANTIES. 10.1 Representations, Warranties of Each Party. As of the Effective Date, each of ViroPharma and AHPC hereby represents, warrants, and covenants to the other Party hereto as follows: (a) it is a corporation or entity duly organized and validly existing under the laws of the state or other jurisdiction of its incorporation or formation; (b) the execution, delivery and performance of this Agreement by such Party has been duly authorized by all requisite corporate action and does not require any shareholder action or approval; (c) it has the power and authority to execute and deliver this Agreement and to perform its obligations hereunder; (d) the execution, delivery and performance by such Party of this Agreement and its compliance with the terms and provisions hereof does not and will not conflict with or result in a breach of any of the terms and provisions of or constitute a default under (i) a loan agreement, guaranty, financing agreement, agreement affecting a product or other agreement or instrument binding or affecting it or its property; (ii) the provisions of its charter or operative documents or bylaws; or (iii) any order, writ, injunction or decree of any court or governmental authority entered against it or by which any of its property is bound; (e) it shall at all times comply with all applicable material laws and regulations relating to its activities under this Agreement; (f) as of the Effective Date, its Patent Rights and Know-How are existing and, to the best of its knowledge, are not invalid or unenforceable, in whole or in part; (g) it has the full right, power and authority to grant all of right, title and interest in the licenses granted to the other Party under this Agreement; 10.2 Additional Representations and Warranties of ViroPharma. In addition to the and warranties made by ViroPharma elsewhere in this Agreement, ViroPharma, subject to Section 10.6, hereby represents, warrants, and covenants to AHPC that: (a) except as disclosed in Exhibit 10.2(a), as of the Effective Date, no Third Party has any right, title or interest in or to: (i) any Collaboration Target listed in Exhibit 1.23, (II) any Class A Product, or (iii) any of the ViroPharma Patent Rights, ViroPharma Know-How, or any of ViroPharma's interest in the Collaboration Patent Rights to the extent that any of the foregoing in this Section 10.2(a)(iii) cover any Collaboration Target listed in Exhibit 1.23, or any Class A Product, with respect to which AHPC has been granted or is to be granted a license hereunder; (b) except as disclosed in Exhibit 10.2(b),It is the sole and exclusive owner of the ViroPharma Patent Rights listed on Exhibit 1.112 and the ViroPharma Know-How existing as of the Effective Date, all of which are free and clear of any liens, charges and encumbrances, and, with respect to such Patent Rights and Know-How, ViroPharma has the right to grant to AHPC those licenses granted in Section 2.1 hereof; (c) except as set forth in Exhibit 10.2(c) attached hereto, no ViroPharma Prior Invention and no ViroPharma Patent Right and no portion of the ViroPharma Know-How existing as of the Effective Date and relating to either any Class A Compound or to any Collaboration Target listed on Exhibit 1.23 is subject to any funding agreement with any government or government agency; (d) to the best of its knowledge, as of November 1, 1999, the practice of the ViroPharma Patent Rights listed on Exhibit 1.112, the use of the ViroPharma Know-How, the use of the Collaboration Targets listed in Exhibit 1.23, and the manufacture, use or sale of any ViroPharma Compound each, as of the Effective Date, do not infringe on any issued patents owned or possessed by any Third Party; (e) to the best of its knowledge, as of the Effective Date, there are no Third Party pending patent applications (other than those which have been disclosed, in writing, by ViroPharma to AHPC prior to the signing of this Agreement) which, if issued, would cover the development, manufacture or use of any Collaboration Target or the development, manufacture, use or sale of any Class A Compound arising from the ViroPharma Chemical Library or any Product containing any Class A Compound arising from the ViroPharma Chemical Library; (f) as of the Effective Date, there are no claims, judgments or settlements against or owed by ViroPharma or, to the best of its knowledge, pending or threatened claims or litigation in either case relating to the ViroPharma Patent Rights listed in Exhibit 1.112, the ViroPharma Know-How, any Collaboration Target, any ViroPharma Class A Compound or any ViroPharma Class B Compound that ViroPharma, as of the Effective Date, plans to Screen during the Screening Phase; and (g) during the Term of this Agreement it will use diligent efforts not to diminish the rights under the ViroPharma Patent Rights or the ViroPharma Know-How granted to AHPC hereunder, including without limitation, by not committing or permitting any actions or omissions which would cause the breach of any agreements between itself and Third Parties which provide for intellectual property rights applicable to the development, manufacture or use of any Target or the development, manufacture, use or sale of any Active Compound arising from the ViroPharma Chemical Library and/or Product containing any Active Compound arising from the ViroPharma Chemical Library, that it will provide AHPC promptly with notice of any such alleged breach, and that as of the Effective Date, it is in compliance in all material respects with any agreements with Third Parties relating to the ViroPharma Patent Rights, the ViroPharma Know How, the Targets and/or the Active Compounds arising from the ViroPharma Chemical Library. 10.3 Additional Representations and Warranties of AHPC. In addition to the representations and warranties made by AHPC elsewhere in this Agreement, AHPC, subject to Section 10.6, hereby represents, warrants, and covenants to ViroPharma that: (a) except as disclosed in Exhibit 10.3(a), it is the sole and exclusive owner of the AHPC Patent Rights listed on Exhibit 1.7 and the AHPC Know-How existing as of the Effective Date, all of which are free and clear of any liens, charges and encumbrances, and, with respect to such Patent Rights and Know-How AHPC has the right to grant to ViroPharma those licenses granted in Section 2.2 hereof; (b) to the best of its knowledge, as of the Effective Date, the practice of the AHPC Patent Rights listed on Exhibit 1.7, the use of the AHPC Know-How, and the manufacture, use or sale of any AHPC Compound each, as of the Effective Date, do not infringe on any issued patents owned or possessed by any Third Party; (c) as of the Effective Date, there are no claims, judgments or settlements against or owed by AHPC or, to the best of its knowledge, pending or threatened claims or litigation in either case relating to the AHPC Patent Rights listed in Exhibit 1.7, the AHPC Know-How, or any AHPC Compound that AHPC, as of the Effective Date, plans to Screen during the Screening Phase; (d) all units of Product supplied in the United States by AHPC pursuant to Section 5.1 will, as of the date of shipment or delivery of such Product to a common carrier, not be adulterated or misbranded within the meaning of the FD&C Act, and not be an article which may not, under the provisions of Sections 404, 505 or 512 of the FD&C Act, be introduced into interstate commerce; (e) all units of Product and containers for such Product supplied by AHPC pursuant to Section 5.1 for sale in the Copromotion Territory shall be manufactured, processed, prepared, packed, and, while in AHPC's possession, held in accordance with all applicable federal, state, and local laws and regulations, including, without limitation, all current Good Manufacturing Practices and with all applicable Regulatory Approvals in the Copromotion Territory; and (f) during the Term of this Agreement it will use diligent efforts not to diminish the rights under the AHPC Patent Rights or the AHPC Know- How granted to ViroPharma hereunder, including without limitation, by not committing or permitting any actions or omissions which would cause the breach of any agreements between itself and Third Parties which provide for intellectual property rights applicable to the development, manufacture, use or sale of any Active Compound arising from the AHPC Chemical Library and/or Product containing any Active Compound arising from the AHPC Chemical Library, that it will provide ViroPharma promptly with notice of any such alleged breach, and that as of the Effective Date, it is in compliance in all material respects with any agreements with Third Parties relating to the AHPC Patent Rights, the AHPC Know How and/or the Active Compounds arising from the AHPC Chemical Library. 10.4 Representation by Legal Counsel. Each Party hereto represents that it has been represented by legal counsel in connection with this Agreement and acknowledges that it has participated in the drafting hereof. In interpreting and applying the terms and provisions of this Agreement, the Parties agree that no presumption shall exist or be implied against the Party which drafted such terms and provisions. 10.5 No Inconsistent Agreements. Neither Party has in effect and after the Effective Date neither Party shall enter into any oral or written agreement or arrangement that would be inconsistent with its obligations under this Agreement. 10.6 Disclaimer. THE FOREGOING WARRANTIES OF EACH PARTY ARE IN LIEU OF ANY OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF NONINFRINGEMENT, ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR ANY IMPLIED WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE ALL OF WHICH ARE HEREBY SPECIFICALLY EXCLUDED AND DISCLAIMED. 11. GOVERNMENT APPROVALS; TERM AND TERMINATION. 11.1 Government Approvals. 11.1.1 ViroPharma's and AHPC's Obligations. Each of ViroPharma and AHPC shall use its good faith efforts to eliminate any concern on the part of any court or government authority regarding the legality of the proposed transaction, including, if required by federal or state antitrust authorities, promptly taking all steps to secure government antitrust clearance, including, without limitation, cooperating in good faith with any government investigation including the prompt production of documents and information demanded by a second request for documents and of witnesses if requested. 11.1.2 Cooperation. ViroPharma and AHPC will cooperate and use respectively all reasonable efforts to make all other registrations, filings and applications, to give all notices and to obtain as soon as practicable all governmental or other consents, transfers, approvals, orders, qualifications authorizations, permits and waivers, if any, and to do all other things necessary or desirable for the consummation of the transactions as contemplated hereby. Neither Party shall be required, however, to divest or out-license products or assets or materially change its business if doing so is a condition of obtaining approval under the HSR Act or other governmental approvals of the transactions contemplated by this Agreement. 11.2 Term. The term of this Agreement will commence on the Effective Date and extend, unless this Agreement is terminated earlier in accordance with this Section 11, on a Product by Product and country by country basis (a) in the AHPC Territory until such time as the obligation to pay royalties with respect to the sale of such Product in such country expires in accordance with Section 7.4.3 and (b) in the Copromotion Territory, until the later of (i) such time as the Parties are no longer copromoting such Product in such country or (ii) if the Parties discontinue the copromotion of Products pursuant to Section 11.6, such time as the obligation to pay royalties with respect to the sale of such Product in such country expires in accordance with Section 7.4.3. 11.3 Expiration. If at any time after the expiration of the Screening Phase Tail, the Parties have determined, in accordance with Section 4.3.3, not to advance any Tail Compound as a Hit or Lead Compound and there is otherwise no Active Compound hereunder, this Agreement shall expire effective as of the later of (a) the date the Parties have determined, in accordance with Section 4.3.3, not to advance any Tail Compound as a Hit or a Lead Compound and (b) the date on which all Active Compounds have ceased to be Active Compounds hereunder. 11.4 Termination for Cause. 11.4.1 Termination for Cause. This Agreement may be terminated effective immediately by written notice by either Party at any time during the Term of this Agreement for material breach by the other Party, which breach remains uncured for ninety (90) days in the case of nonpayment of any amount due (unless there exists a bona fide dispute as to whether such payment is owing, in which case the ninety (90) day period shall be tolled pending resolution of such dispute) and one hundred eighty (180) days for all other breaches, each measured from the date written notice of such breach is given to the breaching Party, provided, however, that if such breach is not susceptible of cure within the stated period and the breaching Party uses diligent good faith efforts to cure such breach, the stated period will be extended by an additional ninety (90) days. 11.4.2 Effect of Termination for Cause on License. If a Party terminates this Agreement pursuant to this Section 11.4 (the "Terminating Party"): (a) all licenses granted by the Terminating Party to the other Party hereunder will automatically terminate; (b) all licenses granted by the other Party to the Terminating Party will become fully paid up, irrevocable, perpetual, royalty-free licenses; (c) the other Party will assign the Terminating Party all right, title and interest in and to: (i) all regulatory filings and Regulatory Approvals pertaining to any Product which regulatory filings and Regulatory Approvals, if any, are owned or otherwise controlled by the other Party, (ii) all of the other Party's interest in the Collaboration Patent Rights and the Collaboration Know-How, (iii) all of the other Party's interest in any Trademark, including, without limitation, the good will symbolized by such Trademark used for Products, and (iv) all of the other Party's interest in any copyrights necessary or useful for Commercializing Products; (d) the other Party will have no right to receive royalties, a share of Net Profits or any other payments which may result from the sale of any Product, the occurrence of any event or the conduct of any activity after the effective date of such termination, provided, however, that the other Party shall remain entitled to receive any payments that accrued before the effective date of such termination. 11.5 Termination for Convenience. 11.5.1 Right to Terminate. After the expiration of the Term of the Screening Phase, either Party may terminate this Agreement upon one hundred eighty days prior written notice to the other Party (a "Termination for Convenience"). 11.5.2 Effect of Termination for Convenience. Upon a Termination for Convenience the non-terminating Party shall have a royalty-bearing, perpetual, irrevocable, worldwide, exclusive license under the other Party's Technology and the other Party's interest in any Collaboration Technology to develop, make, have made, use, import, offer for sale and sell Products in the Field in the world. For the sake of clarity, in such event, the non-terminating Party shall have no rights with respect to any Compound of the terminating Party, which Compound, before the effective date of such termination, was not yet designated as a Lead Compound or a Development Candidate in accordance with Section 4.4. Additionally, in the event of a Termination for Convenience, the terminating Party shall assign to the non-terminating Party all right, title and interest in and to any regulatory filings and Regulatory Approvals pertaining directly to the Products. If a Termination for Convenience occurs before the enrollment of the first patient in a Phase III Clinical Trial in any country of the world, the non-terminating Party, on a Product by Product basis, would pay to the terminating Party a royalty of ******** of the Net Sales obtained from the sale of such Product in the world by the non-terminating Party, its Affiliates or sublicensees. If a Termination for Convenience occurs after the completion of the first Phase III Clinical Trial in any country of the world, the non-terminating Party, on a Product by Product basis, would pay to the terminating Party a royalty of ************* of the Net Sales obtained from the sale of such Product in the world by the non-terminating Party, its Affiliates or sublicensees. Any royalty that becomes payable under this Section 11.5.2 will be payable on a country by country basis until the later of (i) the last to expire, in such country, of the Patent Rights included within the Collaboration Technology containing a Valid Claim which would be infringed by the manufacture, use, import, offer for sale, or sale of such Product in such country or (ii) ten (10) years from the First Commercial Sale of such Product in such country. The non-terminating Party shall provide reports and pay such royalties to the terminating Party in the manner set forth in Section 7.6.2. 11.6 Termination of ViroPharma's Right to Promote Products. 11.6.1 Failure to Provide Assigned Sales Force Effort. If during any ********** ViroPharma fails *************, such failure shall not be considered a material breach for purposes of Section 11.4, but, AHPC, upon sixty (60) days prior written notice to ViroPharma, given within sixty (60) days after AHPC, pursuant to Section 7.6.3, distributes to ViroPharma its share of Net Profits for the last Calendar Quarter of the third such calendar year, may terminate ViroPharma's right to Promote Products in the Copromotion Territory hereunder. Upon the effective date of any such termination, AHPC shall assume all of ViroPharma's obligations with respect to the Promotion of the Product in the Copromotion Territory and thereafter, shall have the right to sublicense Third Parties the rights granted to it by ViroPharma in the Copromotion Territory hereunder. Additionally, if AHPC, pursuant to this Section 11.6.1, terminates ViroPharma's right to Promote Products in the Copromotion Territory hereunder, ViroPharma shall no longer be entitled to receive any share of Net Profits obtained from the sale of Products in the Copromotion Territory after the effective date of such termination, provided, however, that, with respect to the sale of Products in the Copromotion Territory by AHPC, its Affiliates or sublicensees after the effective date of such termination, AHPC shall pay to ViroPharma royalties, on a Product by Product basis, which royalties will be the sum of X, Y and Z, where X = either (a) for ******** of the portion of the aggregate Net Sales obtained by AHPC, its Affiliates and sublicensees from the sale of such Product in the Copromotion Territory, which Net Sales, during the calendar year in question, are less than or equal to ************, or (b) for ************ of the portion of the aggregate Net Sales obtained by AHPC, its Affiliates and sublicensees from the sale of such Product in the Copromotion Territory, which Net Sales, during the calendar year in question, are less than or equal to ******************, Y = either (a) for ***************** of the portion of the aggregate Net Sales obtained by AHPC, its Affiliates and sublicensees from the sale of such Product in the Copromotion Territory, which Net Sales, during the calendar year in question, are greater than **************** and less than or equal to ******************, or (b) for ***************** of the portion of the aggregate Net Sales obtained by AHPC, its Affiliates and sublicensees from the sale of such Product in the Copromotion Territory, which Net Sales, during the calendar year in question, are greater than ******************* and less than or equal to ***************, and Z = either (a) for *************** of the portion of the aggregate Net Sales obtained by AHPC, its Affiliates and sublicensees from the sale of such Product in the Copromotion Territory, which Net Sales, during the calendar year in question, are greater than *****************, or (b) for ************** of the portion of the aggregate Net Sales obtained by AHPC, its Affiliates and sublicensees from the sale of such Product in the Copromotion Territory, which Net Sales, during the calendar year in question, are greater than **************. 11.6.2 Payment and Term of Royalty. If ViroPharma's right to Promote Products in the Copromotion Territory is terminated pursuant to this Section 11.6, the royalties payable pursuant to this Section 11.6, and as adjusted pursuant to Section 7.4.2, will be payable as set forth in Section 7.4.3. 11.6.3 Effect on Other Rights and Obligations. Except as expressly provided in this Section 11.6, any termination of ViroPharma's right to Promote Products in the Copromotion Territory pursuant to this Section 11.6 shall have no effect on any of the other rights and obligations of the Parties under this Agreement, including, without limitation, the rights or obligations of the Parties in conducting the Research Program or the rights or obligations of the Parties in the AHPC Territory. 11.7 Blocking Patents. If during the term of the Research Program: (a) a Third Party is granted a Patent relating to a Collaboration Target in the Copromotion Territory; (b) either Party determines, based on the advice of patent counsel, that such Patent may be infringed by the activities of either Party under the Research Program with respect to one or more Collaboration Targets; and (c) the Parties, within ninety (90) days of making the determination in Section 11.7(b) above, determine that no license is available on commercially reasonable terms after having attempted in good faith to obtain such a license from such Third Party; AHPC shall have the right, exercisable within sixty (60) days after the determination in Section 11.7(c) is made, upon thirty (30) days prior written notice to ViroPharma to terminate that portion of the Research Program under this Agreement covering the Collaboration Targets identified in Section 11.7(b). Upon such termination, subject to Section 11.8 hereof, with respect to such Collaboration Targets neither Party shall have any further rights or obligations under this Agreement, each Party shall retain all rights to its respective Know- How, Prior Inventions and Non-Collaboration Inventions covering only such Collaboration Targets and each Party shall be free to practice any Collaboration Invention and use any Joint-Know-How covering only such Collaboration Targets created by the Parties prior to such termination. 11.8 Survival of Certain Obligations. Expiration or termination of the Agreement shall not relieve the Parties of any obligation accruing before such expiration or termination, and the provisions of Articles 9 and 12 and Sections 2.6, 4.3.3, 4.6.5, 4.6.6, 6.1.7(b), 6.1.8(f-g), 7.4.3, 7.7, 7.8, 8.1, 8.3, 10.3(d-e), 11.4.2, 11.5.2, 11.8, 13.4, 13.8, 13.9 and 13.11 shall survive the expiration of the Agreement. Any expiration or early termination of this Agreement shall be without prejudice to the rights of either Party against the other accrued or accruing under this Agreement before termination, including, without limitation, the obligations to pay royalties and distribute Net Profits for Product(s) sold before such termination. 11.9 Provision for Insolvency. 11.9.1 Termination. This Agreement may be terminated by written notice by either Party at any time during the Term of this Agreement upon the declaration by a court of competent jurisdiction that the other Party is bankrupt and, pursuant to the U.S. Bankruptcy Code such other Party's assets are to be liquidated, the filing or institution of bankruptcy, liquidation or receivership proceedings (other than reorganization proceedings under Chapter 11 of the U.S. Bankruptcy Code), or upon an assignment of a substantial portion of the assets for the benefit of creditors by the other Party, or in the event a receiver or custodian is appointed for such Party's business, or if a substantial portion of such Party's business is subject to attachment or similar process; provided, however, that in the case of any involuntary bankruptcy proceeding such right to terminate shall only become effective if the proceeding is not dismissed within sixty (60) days after the filing thereof. To the extent permitted by applicable law, the effect of a termination under this section 11.9.1 shall be as described in Section 11.5.2, i.e., as if the Insolvent Party elected to Terminate for Convenience. 11.9.2 Effect on Licenses. All rights and licenses granted under or pursuant to this Agreement by one Party to the other Party are, for all purposes of Section 365(n) of Title 11 of the United States Code ("Title 11"), licenses of rights to "intellectual property" as defined in Title 11. Each Party agrees that the other Party, as licensee of such rights under this Agreement shall retain and may fully exercise all of its rights and elections under Title 11. Each Party agrees during the Term of this Agreement to create and maintain current copies or, if not amenable to copying, detailed descriptions or other appropriate embodiments, to the extent feasible, of all such intellectual property. If a case is commenced by or against a Party under Title 11 (the "Title 11 Party"), such Party (in any capacity, including debtor-in-possession) and its successors and assigns (including, without limitation, a Title 11 Trustee) shall, (a) as the other Party may elect in a written request, immediately upon such request: (i) perform all of the obligations provided in this Agreement to be performed by the Title 11 Party including, where applicable and without limitation, providing to the other Party portions of such intellectual property (including embodiments thereof) held by the Title 11 Party and such successors and assigns or otherwise available to them; or (ii) provide to the other Party all such intellectual property (including all embodiments thereof) held by the Title 11 Party and such successors and assigns or otherwise available to them; and (b) not interfere with the rights of the other Party under this Agreement, or any agreement supplemental hereto, to such intellectual property (including such embodiments), including any right to obtain such intellectual property (or such embodiments) from another entity. 11.9.3 Rights to Intellectual Property. If a Title 11 case is commenced by or against the Title 11 Party, and this Agreement is rejected as provided in Title 11, and the other Party elects to retain its rights hereunder as provided in Title 11, then the Title 11 Party (in any capacity, including debtor-in-possession) and its successors and assigns (including, without limitation, a Title 11 Trustee) shall provide to the other Party all such intellectual property (including all embodiments thereof) held by the Title 11 Party and such successors and assigns, or otherwise available to them, immediately upon the other Party's written request. Whenever the Title 11 Party or any of its successors or assigns provides to the other Party any of the intellectual property licensed hereunder (or any embodiment thereof) pursuant to this Section 11.9, the other Party shall have the right to perform the obligations of the Title 11 Party hereunder with respect to such intellectual property, but neither such provision nor such performance by the other Party shall release the Title 11 Party from any such obligation or liability for failing to perform it. 11.9.4 Additional Rights. All rights, powers and remedies of a Party provided herein are in addition to and not in substitution for any and all other rights, powers and remedies now or hereafter existing at law or in equity (including, without limitation, Title 11) in the event of the commencement of a Title 11 case by or against the Title 11 Party. A non-Title 11 Party, in addition to the rights, power and remedies expressly provided herein, shall be entitled to exercise all other such rights and powers and resort to all other such remedies as may now or hereafter exist at law or in equity (including, without limitation, Title 11) in such event. The Parties agree that they intend the foregoing rights to extend to the maximum extent permitted by law, including, without limitation, for purposes of Title 11: (a) the right of access to any intellectual property (including all embodiments thereof) of the Title 11 Party, or any Third Party with whom the Title 11 Party contracts to perform an obligation of the Title 11 Party under this Agreement, and, in the case of the Third Party, which is necessary for the Development, registration, manufacture and Commercialization of licensed Compounds and/or licensed Products; and (b) the right to contract directly with any Third Party described in 11.9.4(a) to complete the contracted work. 12. INDEMNIFICATION AND INSURANCE. 12.1 Indemnification by AHPC. AHPC will indemnify, defend and hold harmless ViroPharma, its Affiliates, and each of its and their respective employees, officers, directors and agents (each, a "ViroPharma Indemnified Party") from and against any and all liability, loss, damage, expense (including reasonable attorneys' fees and expenses) and cost (collectively, a "Liability") that the ViroPharma Indemnified Party may be required to pay to one or more Third Parties resulting from or arising out of: (a) any claims of any nature, other than claims by Third Parties relating to patent infringement, arising out of the conduct of the Research Program by, on behalf of, or under the authority of AHPC (other than by ViroPharma); (b) any AHPC representation or warranty set forth herein being untrue in any material respect when made; (c) the Promotion of any Product by AHPC in the world; (d) any claim of any nature, including any products liability claim, directly arising from the failure of a Product or its container to have been manufactured, processed, prepared, packed, or held in accordance with federal, state, and local laws and regulations, Regulatory Approvals, or AHPC's representations or warranties hereunder; and/or (e) any claims of any nature to the effect that any Trademark selected by AHPC in accordance with Section 8.3 and used by the Parties, their Affiliates, or their sublicensees in conjunction with the Promotion, marketing or sale of any Product pursuant to this Agreement infringes the rights of any Third Party; except in each case, to the extent caused by the negligence or willful misconduct of ViroPharma or any ViroPharma Indemnified Party. Notwithstanding the foregoing, AHPC shall have no obligation to defend, indemnify or hold harmless any ViroPharma Indemnified Party from and against any Liability arising out of or resulting from the infringement of a Third Party patent. 12.2 Indemnification by ViroPharma. ViroPharma will indemnify, defend and hold harmless AHPC, its Affiliates, sublicensees, distributors and each of its and their respective employees, officers, directors and agents (each, an "AHPC Indemnified Party") from and against any and all Liabilities that the AHPC Indemnified Party may be required to pay to one or more Third Parties arising out of: (a) any claims of any nature, other than claims by Third Parties relating to patent infringement, arising out of the conduct of the Research Program by, on behalf of, or under the authority of ViroPharma (other than by AHPC); (b) any ViroPharma representation or warranty set forth herein being untrue in any material respect when made; and/or (c) the Promotion of any Product by ViroPharma in the Copromotion Territory; except in each case, to the extent caused by the negligence or willful misconduct of AHPC or any AHPC Indemnified Party. Notwithstanding the foregoing, ViroPharma shall have no obligation to defend, indemnify or hold harmless any AHPC Indemnified Party from and against any Liability arising out of or resulting from the infringement of a Third Party patent. 12.3 Procedure. Each Party will notify the other in the event it becomes aware of a claim for which indemnification may be sought hereunder. In case any proceeding (including any governmental investigation) shall be instituted involving any Party in respect of which indemnity may be sought pursuant to this Article 12, such Party (the "Indemnified Party") shall promptly notify the other Party (the "Indemnifying Party") in writing and the Indemnifying Party and Indemnified Party shall meet to discuss how to respond to any claims that are the subject matter of such proceeding. The Indemnifying Party, upon request of the Indemnified Party, shall retain counsel reasonably satisfactory to the Indemnified Party to represent the Indemnified Party and shall pay the fees and expenses of such counsel related to such proceeding. In any such proceeding, the Indemnified Party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of the Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the Indemnifying Party and the Indemnified Party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. All such fees and expenses shall be reimbursed as they are incurred. The Indemnifying Party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the Indemnifying Party agrees to indemnify the Indemnified Party from and against any loss or liability by reason of such settlement or judgment. The Indemnifying Party shall not, without the written consent of the Indemnified Party, effect any settlement of any pending or threatened proceeding in respect of which the Indemnified Party is, or arising out of the same set of facts could have been, a party and indemnity could have been sought hereunder by the Indemnified Party, unless such settlement includes an unconditional release of the Indemnified Party from all liability on claims that are the subject matter of such proceeding. 12.4 Insurance. Each Party further agrees to use its Commercially Reasonable Efforts to obtain and maintain, during the term of this Agreement, Commercial General Liability Insurance, including Products Liability Insurance, with reputable and financially secure insurance carriers to cover its indemnification obligations under Sections 12.1 or 12.2, as applicable, or self- insurance, with limits of not less than five million dollars ($5,000,000.00) per occurrence and in the aggregate. 13. MISCELLANEOUS. 13.1 Assignment. Neither this Agreement nor any interest hereunder shall be assignable by either Party without the prior written consent of the other Party, except for assignment in connection with a Change of Control of a Party. This Agreement shall be binding upon the successors and permitted assigns of the Parties and the name of a Party appearing herein shall be deemed to include the names of such Party's successors and permitted assigns to the extent necessary to carry out the intent of this Agreement. Any assignment not in accordance with this Section 13.1 shall be void. 13.2 Further Actions. Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of the Agreement. 13.3 Force Majeure. Neither Party shall be liable to the other for delay or failure in the performance of the obligations on its part contained in this Agreement if and to the extent that such failure or delay is due to circumstances beyond its control which it could not have avoided by the exercise of reasonable diligence. It shall notify the other Party promptly should such circumstances arise, giving an indication of the likely extent and duration thereof, and shall use all Commercially Reasonable Efforts to resume performance of its obligations as soon as practicable, provided, however, that neither Party shall be required to settle any labor dispute or disturbance. Actions taken by a Party to resume performance of its obligations with respect to Screening, Research and Development matters shall be taken in consultation with the JSC, and actions taken by a Party to resume performance of its Commercialization obligations in the Copromotion Territory shall be taken in consultation with the MSC. 13.4 Correspondence and Notices. 13.4.1 Ordinary Notices. Correspondence, reports, documentation, and any other communication in writing between the Parties in the course of ordinary implementation of this Agreement shall be delivered by hand, sent by facsimile transmission (receipt verified), or by airmail to the employee or representative of the other Party who is designated by such other Party to receive such written communication. 13.4.2 Extraordinary Notices. Extraordinary notices and other communications hereunder (including, without limitation, any notice of force majeure, breach, termination, change of address, exercise of rights to negotiate additional agreements, etc.) shall be in writing and shall be deemed given if delivered personally or by facsimile transmission (receipt verified), mailed by registered or certified mail (return receipt requested), postage prepaid, or sent by nationally recognized express courier service, to the Parties at the following addresses (or at such other address for a Party as shall be specified by like notice, provided, however, that notices of a change of address shall be effective only upon receipt thereof): All correspondence to AHPC shall be addressed as follows: Wyeth-Ayerst Laboratories 555 East Lancaster Avenue St. Davids, Pennsylvania 19087 Attn: Senior Vice President, Global Business Development Fax: (610) 688-9498 with a copy to: American Home Products Corporation 5 Giralda Farms Madison, New Jersey 07940 Attn: Senior Vice President and General Counsel Fax: (973) 660-7156 All correspondence to ViroPharma shall be addressed as follows: ViroPharma Incorporated 405 Eagleview Boulevard Exton, Pennsylvania 19341 Attn: Vice President, Business Development Fax: (610) 458-7380 with a copy to: ViroPharma Incorporated 405 Eagleview Boulevard Exton, Pennsylvania 19341 Attn: General Counsel Fax: (610) 458-7380 13.5 Amendment. No amendment, modification or supplement of any provision of this Agreement shall be valid or effective unless made in writing and signed by a duly authorized officer of each Party. 13.6 Waiver. No provision of the Agreement shall be waived by any act, omission or knowledge of a Party or its agents or employees except by an instrument in writing expressly waiving such provision and signed by a duly authorized officer of the waiving Party. 13.7 Severability. If any clause or portion thereof in this Agreement is for any reason held to be invalid, illegal or unenforceable, the same shall not affect any other portion of this Agreement, as it is the intent of the Parties that this Agreement shall be construed in such fashion as to maintain its existence, validity and enforceability to the greatest extent possible. In any such event, this Agreement shall be construed as if such clause of portion thereof had never been contained in this Agreement, and there shall be deemed substituted therefor such provision as will most nearly carry out the intent of the Parties as expressed in this Agreement to the fullest extent permitted by applicable law unless doing so would have the effect of materially altering the right and obligations of the Parties in which event this Agreement shall terminate and all the rights and obligations granted to the Parties hereunder shall cease and be of no further force and effect. 13.8 Descriptive Headings. The descriptive headings of this Agreement are for convenience only, and shall be of no force or effect in construing or interpreting any of the provisions of this Agreement. 13.9 Governing Law. This Agreement shall be governed by and interpreted in accordance with the substantive laws of the State of New Jersey, without regard to conflict of law principles thereof. 13.10 Entire Agreement of the Parties. This Agreement constitutes and contains the complete, final and exclusive understanding and agreement of the Parties and cancels and supersedes any and all prior negotiations, correspondence, understandings and agreements including, without limitation, the Prior Agreement, whether oral or written, among the Parties respecting the subject matter hereof and thereof. 13.11 Independent Contractors. Both Parties are independent contractors under this Agreement. Nothing herein contained shall be deemed to create an employment, agency, joint venture or partnership relationship between the Parties hereto or any of their agents or employees, or any other legal arrangement that would impose liability upon one Party for the act or failure to act of the other Party. Neither Party shall have any express or implied power to enter into any contracts or commitments or to incur any liabilities in the name of, or on behalf of, the other Party, or to bind the other Party in any respect whatsoever. 13.12 Debarment. Each Party agrees that it will not Use, in any capacity, in connection with any of its obligations to be performed under the Research Program any individual who has been debarred under the FD&C Act or the Generic Drug Enforcement Act. 13.13 Counterparts. This Agreement may be executed in any number of counterparts, each of which need not contain the signature of more than one Party but all such counterparts taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, duly authorized representatives of the Parties have duly executed this Agreement to be effective as of the Effective Date. AMERICAN HOME PRODUCTS CORPORATION VIROPHARMA INCORPORATED By /s/ Robert Essner By /s/ Claude H. Nash ----------------------------- -------------------------------- Name: Robert Essner Name: Claude H. Nash Title: Executive Vice President Title: President & CEO EXHIBIT 1.7 AHPC PATENT RIGHTS ------------------ NONE. - -------------------------------------------------------------------------------- December 9, 1999 Collaboration Agreement - Exhibit 1.7 Page 1 EXHIBIT 1.18 CLASS A PRODUCT CHEMICAL SERIES ------------------------------- ******************************* - -------------------------------------------------------------------------------- December 9, 1999 Collaboration Agreement - Exhibit 1.18 Page 1 EXHIBIT 1.23 COLLABORATION TARGETS --------------------- ********************* - -------------------------------------------------------------------------------- December 9, 1999 Collaboration Agreement - Exhibit 1.23 Page 1 EXHIBIT 1.50 ELEMENTS OF FULLY-ABSORBED STANDARD COSTS ----------------------------------------- The following expenses are included in Fully Absorbed Standard Costs for purposes of this Agreement: 1. Direct Materials ---------------- Materials used in the manufacturing process that are traced directly to the completed materials, Compound or Product, as applicable, and include: - Inert raw materials or excipients - Active substances/ingredients at market prices - Packaging components such as bottles, caps, labels, etc. 2. Direct Labor ------------ The cost of employees engaged in production activities which are directly identifiable with manufacturing the materials, Compound or Product, as applicable. Excludes supervision and production support activities such as inspection, plant and equipment maintenance labor, and material handling personnel. Direct Labor cost includes: - Base pay, overtime, vacation and holidays, illness, personal time with pay and shift differential. - Cost of employee fringe benefits such as health and life insurance, payroll taxes, welfare, pension and profit sharing. 3. Allocated Costs --------------- Costs which are allocated to manufacturing the Ingredient based on standard direct labor hours of the manufacturing process. These allocated costs include: - Utilities - expenses incurred for fuel, electricity and water in --------- providing power for production and other plant equipment - Maintenance and repairs - amount of expense incurred in-house or ----------------------- purchased to provide services for plant maintenance and repairs of facilities and equipment. - Depreciation - of plant and equipment utilizing the straight-line ------------ method of calculation. - Insurance - cost of comprehensive and other insurance necessary for --------- the safeguard of manufacturing plant and equipment. - -------------------------------------------------------------------------------- December 9, 1999 Collaboration Agreement - Exhibit 1.50 Page 1 - Permits and Licenses - fees payable to governmental agencies or -------------------- authorities to obtain or maintain permits or licenses that are necessary for the operation of facilities used to manufacture the materials, Compound or Product, as applicable. - Costs of the following manufacturing services --------------------------------------------- . Purchasing and Accounting . Production Scheduling . Inventory Management . Plant Materials Management . Supervision and Production Support Various bases may be used for allocating these costs to manufacturing operating departments including headcount, square feet, metered utilities use, estimated services rendered, EDP computer hours, etc. 4. Testing Costs - direct labor costs for Quality Assurance ("QA") testing and ------------- approving materials used in manufacturing and completed manufacturing batches and finished Products. This includes all manufacturing in-process testing and testing of finished materials. Excluded costs are QA costs related to research and development, stability testing, etc. - -------------------------------------------------------------------------------- December 9, 1999 Collaboration Agreement - Exhibit 1.50 Page 2 EXHIBIT 1.112 VIROPHARMA PATENT RIGHTS ------------------------ ************************** - -------------------------------------------------------------------------------- December 9, 1999 Collaboration Agreement - Exhibit 7.35.4 Page 11.112 Page 1 EXHIBIT 5.4 ADVERSE EVENT REPORTING PROCEDURES ---------------------------------- The Parties hereby agree that the following terms will govern disclosures of each Party to the other with respect to adverse event reporting relating to any Development Candidate or Product as clinically tested or marketed by or on behalf of either Party. 1. Definitions. 1.1 Adverse Experience or Event (AE): An AE is defined by AHPC as any untoward, undesired, or unplanned event in the form of signs, symptoms, disease, or laboratory or physiological observations occurring in a human being in a temporal relationship to use of an AHPC product regardless of causal relationship. This includes: . any clinically significant worsening of a pre-existing condition; . an AE occurring from overdose (i.e., a dose higher than that prescribed by a health care professional for clinical reasons) of an AHPC product, whether accidental or intentional; . an AE occurring from abuse (i.e., use for non-clinical reasons) of an AHPC product; . an AE that has been associated with the discontinuation of the use of an AHPC product; . any failure of expected pharmacological action (for spontaneous reports). If there is any doubt whether the information constitutes an AE, the information will be treated as an AE. 1.2 Serious AE: A serious AE is defined by AHPC as an AE occurring at any dose that: results in death; is life-threatening (see below); requires inpatient hospitalization or prolongation of an existing hospitalization; results in a persistent or significant disability or incapacity (see below); results in cancer; results in a congenital anomaly or birth defect. Additionally, important medical events that may not result in death, be life-threatening, or require hospitalization may be considered a serious AE when, based upon appropriate medical judgment, they may jeopardize the patient or subject and may require medical or surgical intervention to prevent one of the outcomes listed in this definition. Examples of such medical events include allergic bronchospasm requiring intensive treatment in an emergency room or at home; blood dyscrasias or convulsions that do not result in hospitalization; or the development of drug dependency or abuse. - -------------------------------------------------------------------------------- December 9, 1999 Collaboration Agreement - Exhibit 5.4 Page 1 1.2.1 Life-threatening refers to immediate risk of death as the event occurred. A life-threatening experience does not include an experience that, had it occurred in a more severe form, might have caused death but as it actually occurred did not create an immediate risk of death. For example, hepatitis that resolved without evidence of hepatic failure would not be considered life-threatening even though hepatitis of a more severe nature can be fatal. Similarly, an allergic reaction resulting in angioedema of the face would not be life- threatening, even though angioedema of the larynx, allergic bronchospasm, or anaphylaxis can be fatal. 1.2.2 Disability is defined as a substantial disruption in a person's ability to conduct normal life functions. 1.2.3 For studies, all pregnancies and all overdoses will be reported to GSSE in the same time frame as serious AEs. 1.2.4 A serious AE obtained from tests in laboratory animals includes any experience suggesting a significant risk for human subjects, including any findings of mutagenicity, teratogenicity, or carcinogenicity. 1.2.5 If there is any doubt whether the information constitutes a serious AE, the information will be treated as a serious AE. 1.3 Non-Serious AE: is any AE which does not meet the criteria for a serious AE. 1.4 Unexpected AE: An unexpected AE is one that is not listed in the current product labeling. The current product labeling is either the package insert (for marketed AHPC products) or the current investigator's brochure (for investigational AHPC products). An unexpected AE includes any event that may be symptomatically and pathophysiologically related to an event listed in the labeling, but differs from the labeled event because of greater severity or specificity. For example, hepatic necrosis would be unexpected (by virtue of greater severity) if the product labeling referred only to elevated hepatic enzymes or hepatitis. Similarly, cerebral thromboembolism and cerebral vasculitis would be unexpected (by virtue of greater specificity) if the labeling only listed cerebral vascular accidents. 1.5 Product (Drug, Vaccine, Biological, Device)-Related: For the purposes of regulatory reporting for investigational products, an AE will be considered "product-related" (i.e., drug-related, vaccine-related, etc.) for studies if either the investigator, the Medical Monitor, the CR&D Clinical Project Team Medical Monitor (or designee), or the Local Monitor (if applicable) assesses the AE(s) as possibly, probably, or definitely related. - -------------------------------------------------------------------------------- December 9, 1999 Collaboration Agreement - Exhibit 5.4 Page 2 1. An AE will be considered "not product-related" for studies if the investigator and the medical monitor(s) and the local monitor (if applicable) assess the AE(s) as probably not related or definitely not related, or "relationship remote." 2. Whenever the investigator's or monitor's assessment is unknown or unclear, the AE(s) will be treated as product-related for the purposes of reporting to regulatory authorities. 1.6 Protocol-Related: AEs from studies that are not product-related may nevertheless be considered by the investigator or the medical monitor(s) or the local monitor (if applicable) to be protocol- related. For purposes of reporting to GSSE and regulatory authorities, these will be reported in the same manner as product-related events. 1.7 NDA Holder is defined as: An "Applicant" as defined in 21 C.F.R. Section 314.3(b), for regulatory approval of a Product in any regulatory jurisdiction, including a holder of a foreign equivalent thereto. 1.8 IND Holder is defined as: A "Sponsor" as defined in 21 C.F.R. Section 312.3(b) of an investigational new drug in any regulatory jurisdiction, including a holder of a foreign equivalent thereto. 1.9 Capitalized terms not defined in this Exhibit shall have the meaning assigned thereto in the Agreement. 2. With respect to any Development Candidate or Product, the Parties agree as follows: a. All initial reports and any follow-up information (oral or written) for any and all Serious AEs as defined above, (other than with respect to animal studies) which become known to either Party (other than from disclosure by or on behalf of the other Party) must be communicated by telephone, telefax or electronically directly to the other Party and/or the NDA Holder, IND Holder (individually and collectively referred to as "Holders") within forty-eight hours of receipt of the information. Written confirmation of the Serious AE received by such Party should be sent to the other Party and/or the Holders as soon as it becomes available, but in any event within forty-eight hours of initial report of the Serious AE by such Party. b. Both Parties shall exchange Medwatch and/or CIOMs forms and other health authority reports within forty-eight hours of submission to any Regulatory Authority. c. All initial reports and follow-up information received for all Non- Serious AEs for marketed Product which become known to a Party (other than from disclosure by or on behalf of the other Party) must be communicated in writing, by telefax or - -------------------------------------------------------------------------------- December 9, 1999 Collaboration Agreement - Exhibit 5.4 Page 3 electronically to the other Party within ten days, on Medwatch or CIOMs forms (where possible). d. Each Party shall coordinate and cooperate with the other whenever practicable to prepare a single written report regarding all Serious and/or Non-Serious AEs, provided, however, that neither Party shall be obligated to delay reporting of any AE in violation of applicable law or regulations regarding the reporting of AEs. 3. The Parties further agree that: a. A written report be forwarded to the other Party within forty-eight hours of receipt by the Party making the report, for AEs for animal studies which suggest a potential significant risk for humans; b. Each Party will give the other Party a report via a print-out or computer disk of all AEs reported to it and its Affiliates relating to any Development Candidate or Product within the last year, within thirty days of receipt of a request from the other Party but not more often than four times a year; c. If either Party wishes access to AE Reports of the other Party relating to a Development Candidate or Product, upon request of that Party, the other Party shall make available its AE records relating to the Product or Substance (including computer disks) for viewing and copying by the other Party. The Parties may discuss the transfer of AE Reports by computer disk. d. Disclosure of information hereunder by a Party to the other Party shall continue as long as either Party and/or its Affiliates or designees continue to clinically test or market a Development Candidate or Product. 4. Each Party shall diligently undertake the following further obligations where both Parties are or will be commercializing the Development Candidate or Product pursuant to the Agreement and/or performing clinical trials with respect to the Development Candidate or Product: a. Upon the Effective Date, each Party shall identify individuals who shall be responsible for identifying all AE reporting requirements in all countries of the world as set forth in the Agreement, and any amendments thereto; b. To immediately consult with the other Party, with respect to the investigation and handling of any Serious AE disclosed to it by the other Party or by a third Party and to allow the other Party to review the Serious AE and to participate in the follow-up investigation; c. To immediately advise the other Party of any Development Candidate and/or Product safety communication received from a health authority and consult with the other Party with respect to any Product and/or Substance warning, labeling change - -------------------------------------------------------------------------------- December 9, 1999 Collaboration Agreement - Exhibit 5.4 Page 4 or change to an investigators' brochure involving safety issues proposed by the other Party, including, but not limited to the safety issues agreed to by the Parties; d. To diligently handle in a timely manner the follow-up investigation and resolution of each AE reported to it; e. To provide the other Party mutually agreed upon audit rights of its AE reporting system and documentation, upon prior notice, during normal business hours, at the expense of the auditing Party and under the confidentiality obligations set forth in the Agreement; f. To meet in a timely fashion from time to time as may be reasonably required to implement the adverse event reporting and consultation procedures described in this Exhibit 5.4, including identification of those individuals in each Party's Drug Safety group who will be responsible for reporting to and receiving AE information from the other Party, and the development of a written standard operating procedure with respect to adverse event reporting responsibilities, including reporting responsibilities to investigators; g. Where possible, to transmit all data electronically; h. to report to each other any addenda, revisions or changes to the Agreement (e.g., change in territories, local regulations, addition of new licensors/licensees to the Agreement, etc.) which might alter the adverse event reporting responsibilities hereunder; i. to utilize English as the language of communication and data exchange between the Parties; j. to develop a system of exchange of documents and information if the Agreement involves more than two Parties; k. to work together to develop an electronic system to transmit AE data. 5. The Parties may meet after the Effective Date of the Agreement to establish a separate agreement for adverse event exchange which will supersede this Exhibit 5.4. - -------------------------------------------------------------------------------- December 9, 1999 Collaboration Agreement - Exhibit 5.4 Page 5 EXHIBIT 7.3 STOCK PURCHASE AGREEMENT ------------------------ See attached. - -------------------------------------------------------------------------------- December 9, 1999 Collaboration Agreement - Exhibit 7.3 Page 1 EXHIBIT 7.4.1 SAMPLE CALCULATION OF ROYALTY DISTRIBUTIONS ------------------------------------------- *********************************** - -------------------------------------------------------------------------------- December 9, 1999 Collaboration Agreement - Exhibit 7.4.1 Page 1 EXHIBIT 7.5.3 SAMPLE CALCULATIONS OF NET PROFIT DISTRIBUTIONS ----------------------------------------------- ***************************** - -------------------------------------------------------------------------------- December 9, 1999 Collaboration Agreement - Exhibit 7.5.3 Page 1 EXHIBIT 10.2(a) THIRD PARTY RIGHTS, TITLE OR INTEREST IN ----------------------------------------- VIROPHARMA INTELLECTUAL PROPERTY -------------------------------- ******************************* - -------------------------------------------------------------------------------- December 9, 1999 Collaboration Agreement - Exhibit 10.2(a) Page 1 EXHIBIT 10.2(b) THIRD PARTY CLAIMS ON --------------------- VIROPHARMA PATENT RIGHTS AND KNOW-HOW ------------------------------------- ********************* - -------------------------------------------------------------------------------- December 9, 1999 Collaboration Agreement - Exhibit 10.3(a) 10.2.(b) Page 1 EXHIBIT 10.2(c) VIROPHARMA INTELLECTUAL PROPERTY SUBJECT TO ------------------------------------------- GOVERNMENT FUNDING AGREEMENTS ----------------------------- *********************** - -------------------------------------------------------------------------------- December 9, 1999 Collaboration Agreement - Exhibit 10.2(c) Page 1 EXHIBIT 10.3(a) THIRD PARTY CLAIMS ON --------------------- AHPC PATENT RIGHTS AND KNOW-HOW ------------------------------- None. - -------------------------------------------------------------------------------- December 9, 1999 Collaboration Agreement - Exhibit 10.3(a) Page 1 EX-10.26 4 STOCK PURCHASE AGREEMENT EXHIBIT 10.26 SERIES B PREFERRED STOCK PURCHASE AGREEMENT Portions of this exhibit were omitted and filed separately with the Secretary of the Commission pursuant to an application for confidential treatment filed with the Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. Such portions are marked by a series of asterisks. STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of December 9, 1999 by and between ViroPharma Incorporated ("ViroPharma"), a Delaware corporation with its principal place of business at 405 Eagleview Boulevard, Exton, PA 19341, and American Home Products Corporation ("AHPC"), a Delaware corporation with its principal place of business at 5 Giralda Farms, Madison, NJ 07940. RECITALS WHEREAS, ViroPharma and AHPC (through its Wyeth-Ayerst Laboratories Division) have entered into that certain Collaboration and License Agreement of even date herewith (the "Collaboration Agreement"); and WHEREAS, in connection with the Collaboration Agreement, ViroPharma desires to sell to AHPC and AHPC desires to purchase from ViroPharma shares of Common Stock of ViroPharma in the potential aggregate amount of $16,000,000 (sixteen million dollars), on the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and agreements contained herein, the Parties hereto, intending to be legally bound, do hereby agree as follows: 1. Definitions. Unless otherwise indicated, the capitalized terms ----------- used herein shall have the meanings ascribed to them below: 1.1 "Acquiror" means any corporation or other Person that -------- acquires a Party's assets or capital stock or with which a Party merges or consolidates pursuant to a Change of Control. 1.2 "Affiliate" means, with respect to each Party hereto, any --------- entity or other Person that Controls, is Controlled by or is under common Control with such Party; provided, however, that "Affiliate" shall not include subsidiaries or other entities in which a Party owns a majority of the ordinary voting power necessary to elect a majority of the board of directors or other governing board but is restricted from electing such majority by contract or otherwise until such time as such restrictions are no longer in effect. 1.3 "Change of Control" means any of the following: (a) the sale ----------------- or disposition of all or substantially all of the assets of a Party to a Third Party, (b) the acquisition by a Third Party, other than an employee benefit plan (or related trust) sponsored or maintained by a Party or any of its Affiliates, of more than 50% of such Party's outstanding shares of voting capital stock, or (c) the merger or consolidation of a Party with or into another corporation, other than a merger or consolidation of a Party in which holders of shares of such Party's voting capital stock immediately prior to the merger or consolidation will have at least 50% of the ownership of voting capital stock of the surviving corporation immediately after the merger or consolidation. 1.4 "Closings" means the First Closing, the Second Closing and -------- the Third Closing collectively, and each individually, a "Closing." ------- 1.5 "Closing Date" means, with respect to each Closing, the day ------------ on which the transaction that is the subject of such Closing is consummated. 1.6 "Common Stock" means the common stock of ViroPharma, par ------------ value $0.002 per share. 1.7 "Control" means (i) the direct or indirect ownership of at ------- least fifty percent (50%) of the voting stock, capital or equity, or at least a fifty percent (50%) interest in the income of an entity, or (ii) the ability to direct the management of an entity. 1.8 "Deemed Market Price" has the meaning ascribed to it in ------------------- Section 2.1 hereof. 1.9 "Development Candidate" has the meaning ascribed to it in --------------------- the Collaboration Agreement. 1.10 "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended, and the rules and regulations promulgated thereunder. 1.11 "Excluded Registration Statements" means Registration -------------------------------- Statements relating to (a) employee benefit plans, (b) corporate reorganizations or other transactions under Rule 145 of the Securities Act, or (c) shares of ViroPharma's capital stock issued pursuant to that certain Investment Agreement (the "Perseus Shares") dated May 5, 1999 between ViroPharma and Perseus-Soros BioPharmaceutical Fund, LP (the "Perseus Agreement"), and any Common Stock issued upon conversion of the Perseus Shares or upon exercise of warrants issued pursuant to the Perseus Agreement. 1.12 "First Closing" has the meaning ascribed to it in Section ------------- 3.1 hereof. 1.13 "First Purchase Price" has the meaning ascribed to it in -------------------- Section 2.1 hereof. 2 1.14 "*****************" means the first date on which the JSC ----------------- (as defined in the Collaboration Agreement) determines that *****************************************. 1.15 "First Shares" has the meaning ascribed to it in Section 2.1 ------------ hereof. 1.16 "Holder" means any person owning of record Registrable ------ Securities that have not been sold to the public. 1.17 "IND" has the meaning ascribed to it in the Collaboration --- Agreement. 1.18 "Nasdaq" means the Nasdaq Stock Market, Inc. ------ 1.19 "Party" means a party to this Agreement. ----- 1.20 "Person" means any individual, firm, corporation, ------ partnership, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. 1.21 "Purchase Price" means (a) with respect to the First Closing -------------- the First Purchase Price, (b) with respect to the Second Closing, the Second Purchase Price and (c) with respect to the Third Closing, the Third Purchase Price. 1.22 "Register," "Registered," and "Registration" refer to a -------- ---------- ------------ registration effected by preparing and filing a Registration Statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such Registration Statement or document by the SEC. 1.23 "Registrable Securities" means (a) the Shares; and (b) any ---------------------- shares of Common Stock of ViroPharma issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the Shares. Notwithstanding the foregoing, Registrable Securities shall not include any securities sold by a person to the public either pursuant to a Registration Statement or Rule 144 of the Securities Act or sold in a private transaction in which the transferor's rights under Section 8 hereof are not assigned. 1.24 "Registration Expenses" means all expenses incurred by --------------------- ViroPharma in complying with Section 8.1 hereof, including, without limitation, registration and filing fees, printing expenses, fees and disbursements of counsel for ViroPharma, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration, but shall not include Selling Expenses. 1.25 "Registration Statement" means a Registration Statement ---------------------- filed pursuant to the Securities Act. 3 1.26 "Rights Agreement" means that certain Rights Agreement dated ---------------- September 10, 1998 between ViroPharma and StockTrans, Inc. 1.27 "SEC Documents" means ViroPharma's Annual Reports on Form ------------- 10-K for the years ended December 31, 1998 and 1997, and its Quarterly Reports on Form 10-Q for the quarters ended September 30, 1999, June 30, 1999, March 31, 1999, September 30, 1998, June 30, 1998 and March 31, 1998, and its Proxy Statement for its Annual Meeting of Stockholders held on May 14, 1999, each as filed with the SEC, but shall not include any portion of any document which is not deemed to be filed under applicable SEC rules and regulations. 1.28 "SEC" means the U.S. Securities and Exchange Commission. --- 1.29 "Second Closing" has the meaning ascribed to it in Section -------------- 3.2 hereof. 1.30 "***************" means the first date on which the JSC --------------- determines that ***********************************. 1.31 "Second Purchase Price" has the meaning ascribed to it in --------------------- Section 2.2 hereof. 1.32 "Second Shares" has the meaning ascribed to it in Section ------------- 2.2 hereof. 1.33 "Securities Act" means the Securities Act of 1933, as -------------- amended, together with the rules and regulations promulgated thereunder. 1.34 "Selling Expenses" shall mean all underwriting discounts and ---------------- selling commissions applicable to the sale, and all fees and expenses of counsel exclusively for AHPC, if any. 1.35 "Shares" means, individually and collectively, the shares of ------ Common Stock purchased by AHPC pursuant to this Agreement, including the First Shares, the Second Shares and the Third Shares. 1.36 "Third Closing" has the meaning ascribed to it in Section ------------- 3.3 hereof. 1.37 "Third Party(ies)" means any Person(s) other than AHPC, ---------------- ViroPharma or their respective Affiliates. 1.38 "Third Purchase Price" has the meaning ascribed to it in -------------------- Section 2.3 hereof. 1.39 "Third Shares" has the meaning ascribed to it in Section 2.3 ------------ hereof. 1.40 "Triggering Event" means each of the ********************. ---------------- 4 2. Purchases and Sales. ------------------- 2.1 First Purchase. At the First Closing, ViroPharma will sell -------------- to AHPC and AHPC will purchase from ViroPharma that whole number of shares (rounded down to the nearest share) of Common Stock (the "First Shares") determined by dividing Three Million Dollars ($3,000,000) (the "First Purchase Price") by an amount equal to *******************of the Deemed Market Price. For the purposes of this Section 2, the "Deemed Market Price" shall be equal to (a) the average of the last reported sale price of such stock (regular way) as reported on the principal national securities exchange on which ViroPharma's Common Stock is listed or admitted to trading or (b) if ViroPharma's Common Stock is not listed or admitted to trading on any national securities exchange, the average of the closing sales prices of ViroPharma's Common Stock, as reported by Nasdaq, in either case for those days on which ViroPharma's Common Stock was traded during the twenty (20) trading days ending on the trading day prior to the fifth business day immediately preceding the applicable Closing Date (the "Look-back Period"); provided that, if none of ViroPharma's Common Stock is traded during the Look-back Period, or if on such Closing Date the shares of Common Stock are not reported on a national securities exchange or quoted by Nasdaq, then the Deemed Market Price for a share of Common Stock shall be the fair market value of such share as determined in good faith by the Board of Directors of the Company. 2.2 Second Purchase. At the Second Closing, ViroPharma will --------------- sell to AHPC and AHPC will purchase from ViroPharma that whole number of shares (rounded down to the nearest share) of Common Stock (the "Second Shares") determined by dividing Three Million Dollars ($3,000,000) (the "Second Purchase Price") by an amount equal to (a) ************************ of the Deemed Market Price if the Deemed Market Price is less than or equal to Twelve Dollars ($12) per share; (b) ************************ of the Deemed Market Price if the Deemed Market Price is greater than Twelve Dollars ($12) per share and less than or equal to Sixteen Dollars ($16) per share; or (c) ************************ of the Deemed Market Price if the Deemed Market Price is greater than Sixteen Dollars ($16) per share. 2.3 Third Purchase. At the Third Closing, ViroPharma will sell -------------- to AHPC and AHPC will purchase from ViroPharma that whole number of shares (rounded down to the nearest share) of Common Stock (the "Third Shares") determined by dividing Ten Million Dollars ($10,000,000) (the "Third Purchase Price") by an amount equal to (a) ************************ of the Deemed Market Price if the Deemed Market Price is less than or equal to Twelve Dollars ($12) per share; (b) ************************ of the Deemed Market Price if the Deemed Market Price is greater than Twelve Dollars ($12) per share and less than or equal to Sixteen Dollars ($16) per share; or (c) ************************ of the Deemed Market Price if the Deemed Market Price is greater than Sixteen Dollars ($16) per share. 3. Closings. -------- 3.1 First Closing. The completion of the sale and purchase of ------------- the First Shares (the "First Closing") shall be held on such date as the parties shall agree, provided such 5 date is within five (5) days after the effectiveness of the first IND for any Development Candidate. 3.2 Second Closing. The completion of the sale and purchase of -------------- the Second Shares (the "Second Closing") shall be held on such date as the parties shall agree, provided such date is within five (5) days after the *********** for a Development Candidate. 3.3 Third Closing. The completion of the sale and purchase of ------------- the Third Shares (the "Third Closing") shall be held on such date as the parties shall agree, provided such date is within five (5) days after the **************** for a Development Candidate. 3.4 Aggregate Closings. It is the intention of the Parties that ------------------ each of the First Closing, the Second Closing and the Third Closing shall occur only once with potential purchases hereunder aggregating a total of $16,000,000 (sixteen million dollars) without any additional purchase for subsequent Development Candidates. 3.5 H-S-R Act. If the Parties determine that a filing under the --------- H-S-R Act (as defined in Section 9.4 below) would be required as a result of the transactions contemplated by any Closing, then such Closing shall take place on the date that is not more than five (5) business days after the expiration or earlier termination of the applicable waiting period under the H-S-R Act (a "Delayed Closing"). For the sole purposes of determining the Deemed Market Price in respect of such Delayed Closing, and the expiration of the registration rights for the Shares to be issued at the Delayed Closing in Section 8.4 below, the Closing Date for the Delayed Closing shall be deemed to be the fifth day after the date of the applicable Triggering Event giving rise to such Delayed Closing. 3.6 Delivery. At each Closing, subject to the terms and -------- conditions hereof, AHPC shall deliver to ViroPharma the applicable Purchase Price by wire transfer to an account designated in writing by ViroPharma no less than two business days prior to such Closing, and ViroPharma will deliver to AHPC a stock certificate, in the name of AHPC, representing the Shares purchased at such Closing, dated as of the Closing Date, against payment of such Purchase Price. 3.7 Location. Each of the Closings shall occur at the offices of -------- Pepper Hamilton LLP, 1235 Westlakes Drive, Suite 400, Berwyn, Pennsylvania, unless otherwise agreed to by the Parties. 4. Capitalization and Litigation. ViroPharma hereby represents and ----------------------------- warrants to AHPC as follows: 4.1 Capitalization. As of November 30, 1999, the authorized -------------- capital stock of ViroPharma consists of (a) 27,000,000 shares of Common Stock, of which (i) 15,049,415 shares were issued and outstanding, (ii) up to 2,600,000 shares have been reserved for issuance upon conversion of the Series A Stock (defined below); (iii) up to 690,000 shares have been reserved for issuance upon exercise of outstanding common stock warrants, and (iv) 2,000,000 shares have been reserved for issuance under ViroPharma's Stock Option Plan; and (b) 5,000,000 shares of preferred stock, of which (i) 2,300,000 shares have been designated as the Series A Convertible Participating Preferred Stock, par value $.001 per shares (the "Series A 6 Stock"), and are outstanding, and (ii) 200,000 shares have been designated the Series A Junior Participating Preferred Shares, par vale $.01 per share, and have been reserved for issuance pursuant to the Rights Agreement. All issued and outstanding shares of ViroPharma's capital stock have been duly authorized and validly issued, and are fully paid and nonassessable. 4.2 Litigation. There is no action, suit, proceeding nor, to ---------- the best of its knowledge, any investigation, pending or currently threatened against ViroPharma that questions the validity of this Agreement or the issuance of the Common Stock contemplated hereby, nor to best of its knowledge, is there any basis therefor. There is no other action, suit, proceeding nor, to the best of its knowledge, any investigation pending or currently threatened against ViroPharma that might result in any material adverse change in the assets, financial condition or operations of ViroPharma. 5. Additional Representations And Warranties Of ViroPharma. ------------------------------------------------------- ViroPharma hereby further represents and warrants to AHPC as follows: 5.1 Organization and Good Standing. ViroPharma is a corporation ------------------------------ duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. 5.2 Authorization. All corporate action on the part of ------------- ViroPharma, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement have been taken. ViroPharma has the requisite corporate power to enter into this Agreement and to carry out and perform its obligations under the terms of this Agreement. At each Closing, ViroPharma will have the requisite corporate power to sell the applicable Shares. This Agreement has been duly authorized, executed and delivered by ViroPharma and, upon due execution and delivery by AHPC, this Agreement will be a valid and binding agreement of ViroPharma, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by equitable principles. 5.3 No Conflict With Other Instruments. The execution, delivery ---------------------------------- and performance of this Agreement will not result in any violation of, be in conflict with, or constitute a default under, with or without the passage of time or the giving of notice: (a) any provision of ViroPharma's Restated Certificate of Incorporation or Bylaws as in effect on the date hereof or at each Closing; or (b) any provision of any judgment, decree or order to which ViroPharma is a party or by which it is bound. 5.4 Disclosure Documents. ViroPharma's SEC Documents, when -------------------- filed with the SEC (a) did not contain any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, and (b) complied in all material respects with all applicable requirements of the Securities Act or the Exchange Act, as the case may be, and the applicable rules and regulations promulgated thereunder. Since November 19, 1996, ViroPharma has filed with the SEC each form, Registration Statement, report, schedule, proxy, information statement and other documents (including exhibits and 7 amendments thereto) required to be filed by ViroPharma under the Securities Act or the Exchange Act. 5.5 Absence Of Changes. Since March 31, 1999, ViroPharma has ------------------ conducted its business in the ordinary course consistent with past practices, and there has not been: (a) any material adverse change in the condition (financial or otherwise) assets, liabilities or business of ViroPharma; (b) any damage, destruction or casualty loss which would have a material adverse effect on ViroPharma; or (c) any material increase in indebtedness for borrowed money, current liabilities or total liabilities. 5.6 Valid Issuance Of Shares. The Shares which will be purchased ------------------------ by AHPC hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly authorized and issued, fully paid and nonassessable and, based in part upon the representations of AHPC in Section 6.3 of this agreement, will be issued in compliance with all applicable federal and state securities laws. 5.7 Governmental Consents. No consent, approval, order or --------------------- authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of ViroPharma is required in connection with the consummation of the transactions contemplated by this Agreement, except as contemplated by Section 3.4 above and Section 9.4 below and for notices required or permitted to be filed with certain state and federal securities commissions, which notices will be filed on a timely basis. 5.8 No Brokers. No broker, finder or investment banker is ---------- entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this agreement based on arrangements made by ViroPharma. 6. Representations And Warranties Of AHPC. AHPC hereby represents -------------------------------------- and warrants to ViroPharma as follows: 6.1 Legal Power. AHPC has the requisite corporate power to ----------- enter into this agreement, to carry out and perform its obligations under the terms of this Agreement and, at each Closing, will have the requisite corporate power to purchase the Shares. 6.2 Due Execution. This Agreement has been duly authorized, ------------- executed and delivered by AHPC, and, upon due execution and delivery by ViroPharma, this Agreement will be a valid and binding agreement of AHPC, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by equitable principles. 6.3 Investment Representations. In connection with the offer, -------------------------- purchase and sale of the Shares, AHPC makes the following representations: 8 (a) AHPC is acquiring the Shares for its own account, not as nominee or agent, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act. (b) AHPC understands that: (i) the Shares have not been registered under the Securities Act by reason of a specific exemption therefrom, that such securities may be required to be held by it indefinitely under applicable securities laws, and that AHPC must, therefore, bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the Securities Act or is exempt from such registration; (ii) each certificate representing such Shares will be endorsed with the following legends: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM."; and (iii) ViroPharma will instruct its transfer agent not to register the transfer of the Shares (or any portion thereof) unless the conditions specified in the foregoing legends are satisfied. (c) AHPC has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Shares to be purchased hereunder. AHPC has had access to all of the information regarding ViroPharma it has considered necessary to evaluate such investment. (d) AHPC is an "accredited investor" as such term is defined in Rule 501(a) of the rules and regulations promulgated under the Securities Act. 7. Conditions To Closings. ---------------------- 7.1 Conditions To Obligations Of AHPC At Each Closing. AHPC's ------------------------------------------------- obligation to purchase the Shares at each of the Closings is subject to the fulfillment to its reasonable satisfaction, on or prior to each Closing, of all of the following conditions, any of which may be waived by AHPC: 9 (a) Representations And Warranties True. The representations ----------------------------------- and warranties made by ViroPharma in Section 5 hereof shall be true and correct in all material respects on the Closing Date with the same force and effect as if they had been made on and as of said date, and a certificate duly executed by an officer of ViroPharma, to the effect of the foregoing, shall be delivered to AHPC. (b) Performance Of Obligations. ViroPharma shall have performed -------------------------- and complied with all obligations and conditions herein required to be performed or complied with by it on or prior to the Closing and a certificate duly executed by an officer of ViroPharma, to the effect of the foregoing, shall be delivered to AHPC. (c) Proceedings And Documents. All corporate and other ------------------------- proceedings in connection with the transactions contemplated at the Closing and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to AHPC, and AHPC shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request. (d) Qualifications; Legal Investment. All authorizations, -------------------------------- approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful sale and issuance of the Shares shall have been duly obtained and shall be effective on and as of the Closing. No stop order or other order enjoining the sale of the Shares shall have been issued and no proceedings for such purpose shall be pending or, to the knowledge of ViroPharma, threatened by the SEC. 7.2 Conditions To Obligations Of ViroPharma At Each Closing. ------------------------------------------------------- ViroPharma's obligation to issue and sell the Shares at each Closing is subject to the fulfillment to its reasonable satisfaction, on or prior to each Closing, of the following conditions, any of which may be waived by ViroPharma: (a) Representations And Warranties True. The representations ----------------------------------- and warranties made by AHPC in Section 6 hereof shall be true and correct in all material respects on the Closing Date with the same force and effect as if they had been made on and as of said date, and a certificate duly executed by an officer of AHPC, to the effect of the foregoing, shall be delivered to ViroPharma. (b) Performance Of Obligations. AHPC shall have performed and -------------------------- complied with all agreements and conditions herein required to be performed or complied with by it on or before the Closing, and a certificate duly executed by an officer of AHPC, to the effect of the foregoing, shall be delivered to ViroPharma. (c) Qualifications; Legal Investment. All authorizations, -------------------------------- approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful sale and issuance of the Shares shall have been duly obtained and shall be effective on and as of each Closing. No stop order or other order enjoining the sale of the Shares shall have been issued and no proceedings for such purpose shall be pending or, to the knowledge of ViroPharma, threatened by the SEC. 10 7.3 Conditions To The Obligations Of The Parties With Respect to ------------------------------------------------------------ the Separate Closings. In addition the conditions set forth in Sections 7.1 - --------------------- and 7.2 above: (a) First Closing. The obligations of the Parties with respect ------------- to the First Closing are subject to the condition that the first IND for any Development Candidate shall have become effective, which may be waived as a condition only upon the mutual agreement of the Parties. (b) Second Closing. The obligations of the Parties with respect -------------- to the Second Closing are subject to the condition that a **************** for a Development Candidate shall have occurred, which may be waived as a condition only upon the mutual agreement of the Parties. (c) Third Closing. The obligations of the Parties with respect ------------- to the Third Closing are subject to the condition that a ************** for a Development Candidate shall have occurred, which may be waived as a condition only upon the mutual agreement of the Parties. 8. Registration Rights. ------------------- 8.1 Piggyback Registrations. ViroPharma shall notify all Holders ----------------------- of Registrable Securities in writing at least twenty (20) days prior to the filing of any Registration Statement (the "Registration Notice"), other than an Excluded Registration Statement, under the Securities Act for purposes of a public offering of Common Stock of ViroPharma (including, but not limited to, Registration Statements relating to secondary offerings of Common Stock of ViroPharma), and will afford each such Holder an opportunity to include in such Registration Statement (other than an Excluded Registration Statement) all or part of such Registrable Securities held by such Holder. Each Holder desiring to include in any such Registration Statement all or any part of the Registrable Securities held by it shall, within ten (10) days after receiving the Registration Notice from ViroPharma, so notify ViroPharma in writing. Such notice shall state the intended method of disposition of the Registrable Securities by such Holder. If a Holder does not elect to include all of its Registrable Securities in any Registration Statement thereafter filed by ViroPharma, such Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent Registration Statement or Registration Statements as may be filed by ViroPharma with respect to offerings of its securities (other than an Excluded Registration Statement), all upon the terms and conditions set forth herein. (a) Underwriting. If the Registration Statement under which ------------ ViroPharma gives notice under this Section 8.1 is for an underwritten offering, ViroPharma shall so advise the Holders of Registrable Securities. In such event, the right of any such Holder to be included in a registration pursuant to this Section 8.1. shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form, reasonably acceptable to such Holder, with the underwriter or underwriters selected for such underwriting by ViroPharma, including the indemnification provisions thereof. Notwithstanding any other provision of the Agreement, if the underwriter determines in good 11 faith that marketing factors require a limitation of the total number of shares to be underwritten, the number of shares that may be included in the underwriting by the Holders may be reduced in the manner contemplated by that certain Investors' Rights Agreement dated as of May 30, 1996 among ViroPharma and the other signatories thereto (the "Investors' Rights Agreement"); provided that, in connection with such underwritten offering and upon the request of the Holders, ViroPharma shall use its reasonable efforts to acquire waivers of the rights granted under Section 1.6 of the Investors' Rights Agreement to the Key Employees and Founders (as each is defined in the Investors' Rights Agreement) to the extent that the absence of such waivers would adversely effect the ability of the Holders to include their shares of Registrable Securities in such underwriting. (b) Right To Terminate Registration. ViroPharma shall have the ------------------------------- right to terminate or withdraw any registration initiated by it under this Section 8.1 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. 8.2 Expenses Of Registration. Except as specifically provided ------------------------ herein, all Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Section 8.1 shall be borne by ViroPharma, and Selling Expenses incurred in connection with any registrations hereunder shall be borne by the Holders of the securities so registered pro rata on the basis of the number of shares so registered. 8.3 Obligations Of ViroPharma. The obligations of ViroPharma to ------------------------- effect the registration of any Registrable Securities pursuant to this Section 8 shall at all times be subject to the restrictions set forth in Section 9.1. Whenever required to effect such a registration, ViroPharma shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a Registration Statement with respect to such Registrable Securities and use all reasonable efforts to cause such Registration Statement to become effective. (b) Prepare and file with the SEC such amendments and supplements to such Registration Statement and the prospectus used in connection with such Registration Statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement. (c) Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use all reasonable efforts to register and qualify the securities covered by such Registration Statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that ViroPharma shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. 12 (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. In addition, ViroPharma shall, upon the request of the managing underwriter, make available ViroPharma management to participate in customary selling efforts or "road shows," as appropriate. (f) Notify each Holder of Registrable Securities covered by such Registration Statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Furnish, at the request of the Holders participating in the registration, on the date that such Registrable Securities are delivered to the underwriters for sale: (i) an opinion, dated as of such date, of the counsel representing ViroPharma for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, and (ii) a letter dated as of such date, from the independent certified public accountants of ViroPharma, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters. 8.4 Termination Of Registration Rights. Registration rights with ---------------------------------- respect to any Registrable Securities granted to a Holder under this Section 8 shall terminate and be of no further force and effect upon the date, following AHPC's acquisition of all of the Shares available to it hereunder, on which AHPC owns less than three percent (3%) of ViroPharma's outstanding Common Stock. This Section 8 and the registration rights granted hereunder in respect of the First Shares, the Second Shares and the Third Shares shall terminate in their entirety seven (7) years from the Closing Dates of the First Closing, the Second Closing and the Third Closing, respectively. 8.5 Delay Of Registration; Furnishing Information. --------------------------------------------- (a) No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 8. (b) It shall be a condition precedent to the obligations of ViroPharma to take any action pursuant to Section 8.1 that the selling Holders shall furnish to ViroPharma such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as shall be legally required under the Securities Act to effect the registration of their Registrable Securities. 13 8.6 Indemnification; Contribution ----------------------------- (a) ViroPharma shall indemnify and hold harmless each Holder from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) arising out of or based upon any untrue statement of a material fact contained in any Registration Statement, prospectus or preliminary prospectus or notification or offering circular (as amended or supplemented if ViroPharma shall have furnished any amendments or supplements thereto) or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information concerning such Holder furnished in writing to ViroPharma by such Holder expressly for use in such Registration Statement. (b) In connection with any Registration Statement in which a Holder is participating pursuant to Section 8 hereof, each such Holder shall furnish to ViroPharma in writing such information with respect to such Holder as ViroPharma may reasonably request or as may be required by law specifically for use in connection with any such Registration Statement or prospectus. Each Holder shall indemnify and hold harmless ViroPharma, any underwriter retained by ViroPharma and their respective directors, officers, employees and each Person who controls ViroPharma or such underwriter (within the meaning of the Securities Act and the Exchange Act) from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) arising out of or based upon any untrue, or allegedly untrue, statement of a material fact contained in any Registration Statement, prospectus or preliminary prospectus or notification or offering circular (as amended or supplemented if ViroPharma shall have furnished any amendments or supplements thereto) or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such statement or omission was made in reliance upon and in conformity with any information concerning such Holder furnished in writing to ViroPharma by such Holder specifically for use in the preparation of such Registration Statement or prospectus; provided, however, -------- ------- that the total amount to be indemnified by such Holder pursuant to this Section 8.6(b) shall be limited to the net proceeds received by the Holders in the offering to which the Registration Statement or prospectus relates. (c) Any Person entitled to indemnification hereunder (the "Indemnified Party") agrees to give prompt written notice to the indemnifying party (the "Indemnifying Party") after the receipt by the Indemnified Party of any written notice of the commencement of any action, suit, proceeding or investigation or threat thereof made in writing for which the Indemnified Party intends to claim indemnification or contribution pursuant to this Agreement; provided, however, that the failure so to notify the Indemnifying Party shall - -------- ------- not relieve the Indemnifying Party of any liability that it may have to the Indemnified Party hereunder unless, and only to the extent that, such failure results in the Indemnifying Party's forfeiture of substantive rights or defenses. If notice of commencement of any such action is given to the Indemnifying Party as above provided, the Indemnifying Party shall be entitled to participate in and, to the extent it may wish, jointly with any other Indemnifying Party similarly notified, to assume the defense of such action at its own expense, with counsel chosen by it and 14 reasonably satisfactory to such Indemnified Party. The Indemnified Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel (other than reasonable costs of investigation) shall be paid by the Indemnified Party unless (i) the Indemnifying Party agrees to pay the same, (ii) the Indemnifying Party fails to assume the defense of such action with counsel reasonably satisfactory to the Indemnified Party in its reasonable judgment or (iii) the named parties to any such action (including any impleaded parties) have been advised by such counsel that either (x) representation of such Indemnified Party and the Indemnifying Party by the same counsel would be inappropriate under applicable standards of professional conduct or (y) there may be one or more legal defenses available to it which are different from or additional to those available to the Indemnifying Party. In either of such cases, the Indemnifying Party shall not have the right to assume the defense of such action on behalf of such Indemnified Party. No Indemnifying Party shall be liable for any settlement entered into without its written consent (other than in the case where the Indemnified Party is unconditionally released from liability and its rights are not adversely effected), which consent shall not be unreasonably withheld. (d) If the indemnification provided for in this Section 8.6 from the Indemnifying Party pursuant to applicable law is unavailable to an Indemnified Party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative faults of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Sections 8.6(a), (b) and (c), any legal or other fees, charges or expenses reasonably incurred by such party in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 8.6(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person. 8.7 Assignment Of Registration Rights. The rights to cause ViroPharma --------------------------------- to register Registrable Securities pursuant to this Section 8 may be assigned by a Holder to a transferee or assignee of Registrable Securities that is an Affiliate or a successor to substantially all the business or assets of the Holder; provided, however (i) the transferor shall, within ten (10) days after such transfer, furnish to ViroPharma written notice of the name and address of such transferee or assignee and the securities with respect to which such registration 15 rights are being assigned, and (ii) such transferee shall agree to be subject to all restrictions with respect to the Shares set forth in this Agreement. 8.8 "Market Stand-Off" Agreement. If requested by ViroPharma or the --------------------------- representative of the underwriters of Common Stock (or other securities) of ViroPharma, each Holder shall agree not to sell or otherwise transfer or dispose of any Common Stock (or other securities) of ViroPharma held by such Holder (other than those included in the registration, if any) for a period commencing on the date that such Holder receives the Registration Notice (but in no case earlier than 30 days prior to the date of the filing of the applicable Registration Statement) and continuing for the period specified by the representative of the underwriters not to exceed ninety (90) days following the effective date of a Registration Statement of ViroPharma filed under the Securities Act, provided that all executive officers and directors of ViroPharma enter into similar agreements. Notwithstanding the foregoing, AHPC shall have no obligations under this Section 8.8: (a) in respect of a private placement by AHPC of any Common Stock (or other securities) of ViroPharma to the extent that such private placement occurs prior to the filing of the applicable Registration Statement, and (b) from and after the date that AHPC's registration rights granted hereunder have terminated in their entirety and (c) during any period that AHPC owns less than three percent (3%) of ViroPharma's outstanding Common Stock. 9. Covenants. --------- 9.1 Covenant Of AHPC. AHPC hereby covenants and agrees that it ---------------- shall not exercise the registration rights described in Section 8 during the two (2) year period following the date of this Agreement. 9.2 Covenant Of ViroPharma. ViroPharma hereby covenants and ---------------------- agrees that it shall take all necessary and appropriate actions to ensure that it shall have available under its Restated Certificate of Incorporation as in effect on the Closing Date sufficient authorized but unissued shares of its Common Stock to issue and sell to AHPC all of the Shares. 9.3 Rights Agreement. In the event that the purchase of the ---------------- Shares hereunder by AHPC at any Closing would cause AHPC to become an "Acquiring Person," as such term is defined in the Rights Agreement, because either (a) the Shares, by themselves, constitute in excess of 20% of then-outstanding Common Stock of ViroPharma (the "Threshold"), or (b) after the date hereof, AHPC acquires a third party that owns capital stock of ViroPharma and whose ownership of capital stock of ViroPharma is not the primary business purpose of such third party (the "Third Party ViroPharma Stock"), and when the Shares are added together with Third Party ViroPharma Stock, AHPC's aggregate beneficial ownership exceeds the Threshold, then prior to the consummation of the Closing that would cause AHPC to become an Acquiring Person, ViroPharma shall cause the Rights Agreement to be amended to ensure that the acquisition of the Shares at such Closing does not cause AHPC to become an Acquiring Person. Notwithstanding the foregoing, nothing in this Section 9.3 shall require ViroPharma to amend the Rights Agreement if AHPC's purchase of the Shares would result in AHPC becoming an Acquiring Person because such Shares, when added to any shares of the capital stock of ViroPharma acquired by AHPC other than under this Agreement or as 16 specifically described in clause (b) of this Section 9.3, causes AHPC's ownership to exceed the Threshold. 9.4 Covenant of the Parties. If required by applicable law, ----------------------- as concluded in good faith by the Parties, prior to the consummation of any purchases of the Shares pursuant to Sections 2 and 3 above, the Parties will, at their own expense (other than any required filing fees which shall be paid by AHPC), prepare and make appropriate filings under Title II of the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder (16 C.F.R. Sections 801.1 et. seq.)(the "H-S- R Act"). Each Party shall use its reasonable good faith efforts (not including divestiture or out-license of any assets) in the antitrust clearance process and the resolution of all issues or comments raised, and agrees to furnish to the Federal Trade Commission and the Antitrust Division of the Department of Justice any additional information reasonably requested by them in connection with such filings and the transaction contemplated by this Agreement; provided, however, that such efforts shall not require any out-license or divestiture by either party of any products or other assets. In addition, each Party agrees to give the other party prompt notice of any communication to or from the Federal Trade Commission or the Department of Justice regarding this transaction. Each Party will consult and cooperate with the other Party and will consider in good faith the view of the other Party in connection with any analysis, appearance, presentation, memorandum, brief, opinion or proposal made or submitted in connection with any action, request, or investigation under or relating to the H-S-R Act or any other federal antitrust, competition or fair trade law. 10. Miscellaneous. ------------- 10.1 Change of Control. ----------------- a. If AHPC is subject to a Change of Control under which AHPC is not the surviving entity, then AHPC shall use diligent efforts to ensure that the Acquiror shall agree to be substituted for AHPC as a party to this Agreement. b. If ViroPharma is subject to a Change of Control under which ViroPharma is not the surviving entity, then ViroPharma shall use diligent efforts to ensure that the Acquiror shall agree to be substituted for ViroPharma as a party to this Agreement and agree to assume in writing all obligations of ViroPharma under this Agreement, including but not limited to the registration rights described in Section 8 which would then apply to the Registration Statements of Acquiror, which agreement shall be in a form reasonably acceptable to AHPC; provided, however, that notwithstanding anything to the contrary set forth in Sections 2.1 through 2.3 above, from and after the effective date of such Change of Control, upon a Triggering Event such Acquiror shall have the option to sell to AHPC at the applicable Purchase Price, and upon such Acquiror's exercise of such option AHPC shall have the obligation to purchase from such Acquiror at the applicable Purchase Price, that whole number of shares (rounded down to the nearest share) of the Acquiror's common stock determined with reference to the Acquiror's Market Capitalization, as described below. In determining the number of shares of Acquiror's common stock that Acquiror may sell to AHPC hereunder, the Purchase Price applicable to the particular Closing shall be divided by the product of the applicable Deemed Market Price times the Percentage of Deemed Market Price. 17 Notwithstanding the foregoing, in the event that the Acquiror shall not agree in writing within 90 days from the effective date of the Change of Control (but in any event prior to any purchase requirement hereunder) to assume all obligations of ViroPharma under this Agreement, AHPC's obligation to purchase capital stock in the event of a Triggering Event shall be cancelled. The "Percentage of Deemed Market Price" is the percentage set forth below opposite the range of "Market Capitalization of Acquiror," also as set forth below, in which Acquiror's Market Capitalization applies: Market Capitalization of Acquiror Percentage of Deemed Market Price --------------------------------- --------------------------------- Up to $1,000,000,000 ********** $1,000,000,001 - $2,500,000,000 ********** $2,500,000,001 - $5,000,000,000 ********** In excess of $5,000,000,000 ********** provided, however, that with respect to the First Purchase Price to purchase the First Shares, the price per share shall equal the product of the applicable Deemed Market Price times the lesser of (i) the percentage of the Deemed Market Price set forth in Section 2.1 hereof, or (ii) the Percentage of the Deemed Market Price, as determined in this Section 10.1. In the event that the Acquiror is subsequently subject to a Change of Control, all obligations of AHPC to purchase Shares hereunder shall terminate. To illustrate this Section 10.1, ************************. c. As used in this Section: (i) the Acquiror's "Market Capitalization" means the product of the aggregate number of shares of Acquiror's capital stock outstanding (calculated on a fully diluted basis) on the date of any applicable Triggering Event times the Fair Market Value (as defined below) of Acquiror's common stock on date of each such Triggering Event; and (ii) "Fair Market Value" means, on the date of each Triggering Event (A) the average of the last reported sale price of such stock (regular way) as reported on the principal national securities exchange on which Acquiror's common stock is listed or admitted to trading or (B) if such common stock is not listed or admitted to trading on any national securities exchange, the closing sales prices of Acquiror's common stock, as reported by Nasdaq. 10.2 Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the laws of the Commonwealth of Pennsylvania, without regard to the choice of law provisions thereof, and the federal laws of the United States. 10.3 Public Statements. Any statement to the public regarding ----------------- this Agreement and the license agreement shall be approved in advance by ViroPharma and AHPC, except as otherwise required by law. 18 10.4 Successors And Assigns. Except as otherwise expressly ---------------------- provided herein, neither Party may assign this agreement without the prior written consent of the other Party. Notwithstanding the preceding sentence, in connection a Change of Control of either Party, such Party may assign its rights and obligations under this Agreement in whole or in part to such Party's transferee or successor in interest without the prior written consent of the other Party. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto. 10.5 Entire Agreement. This Agreement, the Collaboration ---------------- Agreement and the exhibits thereto, and the other documents delivered pursuant hereto, constitute the full and entire understanding and agreement among the Parties with regard to the subjects hereof and no Party shall be liable or bound to any other Party in any manner by any representations, warranties, covenants, or agreements except as specifically set forth herein or therein. Nothing in this Agreement, express or implied, is intended to confer upon any Party, other than the parties hereto and their respective successors and assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided herein. 10.6 Separability. In the event any provision of this Agreement ------------ shall be invalid, illegal, or unenforceable, it shall to the extent practicable, be modified so as to make it valid, legal and enforceable and to retain as nearly as practicable the intent of the Parties, and the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 10.7 Amendment And Waiver. Except as otherwise provided herein, -------------------- any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely), with the written consent of ViroPharma and AHPC. Any amendment or waiver effected in accordance with this Section shall be binding upon any holder of any securities purchased under this Agreement (including securities into which such securities have been converted), each future holder of all such securities, and ViroPharma. 10.8 Notices. All notices, requests, or other communications ------- given hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand; (ii) mailed by registered or certified mail; (iii) sent by air courier; or (iv) sent by cable, telex or facsimile, followed within twenty-four (24) hours by notification pursuant to (i), (ii) or (iii) above, in each case to the address set forth below or to such other address as a Party may specify for itself by written notice given as aforesaid. If to AHPC: American Home Products Corporation 5 Giralda Farms Madison, NJ 07940 FAX: 973-660-7156 Attention: Chief Financial Officer 19 with a copy to: American Home Products Corporation 5 Giralda Farms Madison, NJ 07940 FAX: 973-660-7155 Attention: Senior Vice President and General Counsel If to ViroPharma: ViroPharma Incorporated 405 Eagleview Boulevard Exton, PA 19341 FAX: 610-458-7380 Attention: Chief Financial Officer with a copy to: ViroPharma Incorporated 405 Eagleview Boulevard Exton, PA 19341 FAX: 610-458-7380 Attention: General Counsel 10.9 Fees And Expenses. ViroPharma and AHPC shall each bear ----------------- their own expenses and legal fees incurred on their behalf with respect to this Agreement and the transactions contemplated hereby. 10.10 Titles And Subtitles. The titles of the Sections and -------------------- subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 10.11 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 one instrument. 20 IN WITNESS WHEREOF, this Agreement is hereby executed as of the date first above written. VIROPHARMA INCORPORATED By: /s/ Claude H. Nash -------------------------- Name: Claude H. Nash Title: President and CEO AMERICAN HOME PRODUCTS CORPORATION By: /s/ Robert Essner -------------------------- Name: Robert Essner Title: Executive Vice President 21 EX-11 5 STATEMENT OF COMPUTATION OF LOSS PER SHARE EXHIBIT 11 ViroPharma Incorporated Computation of Net Loss per Share
1997 1998 1999 Net Loss (11,449,883) (26,402,116) (29,500,038) Accretion of redemption value attributable to mandatorily redeeemable convertible preferred stock - - - Preferred stock dividends, including beneficial conversion component 934,533 Beneficial conversion feature of preferred stock 4,140,000 Net loss allocable to shareholders (11,449,883) (26,402,116) (34,574,571) Weighted average shares outstanding 10,092,590 11,485,589 12,181,853 Shares assumed to be outstanding related to stock options and warrants granted for nominal consideration - - - Shares used in computing diluted net loss per share 10,092,590 11,485,589 12,181,853 Net loss per share Basic (1.13) (2.30) (2.84) Diluted (1.13) (2.30) (2.84)
EX-23 6 CONSENT OF KPMG LLP EXHIBIT 23 Independent Auditors' Consent The Board of Directors ViroPharma Incorporated: We consent to incorporation by reference in the registration statements (No. 333-34129 and No. 333-60951) on Form S-8 of ViroPharma Incorporated of our report dated February 23, 2000, except as to note 13, which is as of March 8, 2000 relating to the balance sheets of ViroPharma Incorporated (A Development Stage Company) as of December 31, 1998 and 1999, and the related statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999, and for the period December 5, 1994 (Inception) to December 31, 1999, which report appears in the December 31, 1999, Annual Report on Form 10-K of ViroPharma Incorporated. KPMG LLP Princeton, New Jersey March 14, 2000 EX-27 7 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 6,984,707 59,868,213 114,318 0 0 67,960,889 4,683,343 1,213,416 72,085,866 9,269,630 0 0 2,300 30,133 58,258,803 72,085,866 0 0 0 0 31,042,336 0 153,956 (29,500,038) 0 (29,500,038) 0 0 0 (29,500,038) (2.84) (2.84)
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