-----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, TcuALviOxA2WkdivEm6qw8JkpGZHnL+ooFFp/NzPt3vASSEVG4R0DvmXAuEzMOLg Wwat5OSzLIVw7X9v+p+PnQ== 0000936392-98-000525.txt : 19980401 0000936392-98-000525.hdr.sgml : 19980401 ACCESSION NUMBER: 0000936392-98-000525 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIGAND PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000886163 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 770160744 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20720 FILM NUMBER: 98581684 BUSINESS ADDRESS: STREET 1: 9393 TOWNE CENTRE DR STE 100 CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6195353900 MAIL ADDRESS: STREET 1: 9393 TOWNE CENTRE DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92121 10-K 1 FORM 10-K 1 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, 1997, OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD COMMISSION FILE NUMBER: 0-20720 FROM ______________ TO _____________ . LIGAND PHARMACEUTICALS INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 77-0160744 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 10275 SCIENCE CENTER DRIVE 92121-1117 SAN DIEGO, CA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 550-7500 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.001 PAR VALUE (TITLE OF CLASS) SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: WARRANTS TO PURCHASE ONE SHARE OF COMMON STOCK, $.001 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Registrant's voting stock held by non-affiliates as of February 28, 1998 was $488,205,375. For purposes of this calculation, shares of Common Stock held by directors, officers and 5% stockholders known to Registrant have been deemed to be owned by affiliates which should not be construed to indicate that any 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. As of February 28, 1998 the registrant had 38,594,979 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement to be filed not later than 120 days after December 31, 1997, in connection with the Registrant's 1998 Annual Meeting of Stockholders, referred to herein as the "Proxy Statement", are incorporated by reference into Part III of this Form 10-K. 2 PART I ITEM 1. BUSINESS The discussion of the Company's business contained in this Annual Report on Form 10-K may contain certain projections, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed below at "Risks and Uncertainties." While this outlook represents management's current judgment on the future direction of the business, such risks and uncertainties could cause actual results to differ materially from any future performance suggested below. The Company undertakes no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date hereof. OVERVIEW Ligand Pharmaceuticals Incorporated ("Ligand" or the "Company"), a Delaware corporation, is a biopharmaceutical company engaged in the discovery and development of small-molecule drugs which mimic or block the activities of various hormones and cytokines to regulate gene activity and the genetic processes affecting many diseases. The Company's drug discovery and development programs are based on its proprietary technologies involving two natural mechanisms that regulate gene activity: (i) hormone-activated Intracellular Receptors ("IRs") and (ii) cytokine-activated Signal Transducers and Activators of Transcription ("STATs"). IRs play key roles in many disease processes, including certain cancers, disorders of women's health, cardiovascular diseases, metabolic diseases, inflammatory disorders and skin diseases. Similarly, STATs influence many biological processes, including cancer, metabolic diseases, inflammation and blood cell formation. In programs acquired in connection with the merger with Glycomed Incorporated ("Glycomed") in May 1995 ("the Merger"), Ligand is also seeking, through licensees, to develop orally active drugs to modulate biological processes involving complex carbohydrates and other cell surface components for the treatment of inflammation and cancer. Ligand currently is developing new drugs through a combination of internal and collaborative programs, including substantial collaborations with Eli Lilly and Company ("Lilly"), SmithKline Beecham Corporation ("SmithKline Beecham"), Wyeth-Ayerst, the pharmaceutical division of American Home Products ("AHP"), Abbott Laboratories ("Abbott"), Glaxo-Wellcome plc ("Glaxo"), Sankyo Company, Ltd. ("Sankyo"), Pfizer Inc ("Pfizer") and Allergan, Inc., ("Allergan"). Ligand has initiated human clinical trials for five potential products: the retinoids Panretin Capsules (LGD1057), Panretin Gel (LGD1057), LGD1550 Capsules, Targretin Gel (LGD1069) and Targretin Capsules (LGD1069). Ligand also has 25 non-retinoid compounds in various stages of development, including a three compound series being developed by AHP, as well as two compounds which are now under development by Pfizer for osteoporosis. IRs are members of a family of hormone-activated proteins that act inside the cell to directly regulate gene expression and cellular function. Although the effectiveness of IRs as drug targets has been demonstrated by drugs acting through IRs already on the market, such as retinoids (e.g., Retin-A(R) for acne and psoriasis) and sex steroid modulators (e.g., estrogens and progesterones for hormone replacement therapy and contraception, tamoxifen for breast cancer, flutamide for prostate cancer), the utility of these first-generation drugs has been limited by their often significant side effects. STATs are a recently discovered family of proteins that act inside cells to regulate gene expression in response to various cytokines such as interferons, interleukins and hematopoietic growth factors. Imbalances in the activity of these cytokines can lead to various pathological conditions, such as inflammation. While certain recombinant cytokines and other proteins which bind to cell surface receptors have proven to have clinical utility in the treatment of disease, they must be administered by injection and can be difficult to manufacture. Ligand and its exclusive academic collaborators have advanced the understanding of the activities of hormones and hormone-related drugs and have made scientific discoveries relating to IR and STATs technologies. Ligand believes that its expertise in these technologies will enable the Company to develop novel, small-molecule pharmaceutical products acting through IRs or STATs with more target-specific 1 3 properties than currently available products, resulting in either improved therapeutic and side effect profiles and new indications for IRs or novel mechanisms of action and oral bioavailability for STATs. Through a combination of internal and partnered programs, supplemented by selective in-licensing of approved cancer products, Ligand has built a pipeline of numerous potential products and products in advanced preclinical testing, clinical development or commercialization stages. The most advanced of these potential products and products are as follows:
PROGRAM PRODUCT DISEASE INDICATION DEVELOPMENT PHASE(1) - --------------------------------------------------------------------------------------------------------------- Retinoids Panretin(TM) Gel (LGD1057) Kaposi's Sarcoma ("KS") III Panretin(TM) Capsules Cancers including KS, other cancers II Psoriasis II LGD1550 Capsules Cancers I/IIA Targretin(TM) Gel (LGD1069) Cutaneous T cell lymphoma ("CTCL") III Actinic Keratoses II Targretin(TM) Capsules CTCL II/III Lung cancer, breast cancer II/III Cancers, including, kidney, KS, II prostate, ovarian Metabolic diseases (diabetes) II(2) Psoriasis II Sex steroids Droloxifene(3) Osteoporosis II CP336,156(4) Osteoporosis II Oncology Proleukin(R)(5) Kidney cancer Marketed in Canada PHOTOFRIN(R)(5) Bladder cancer, esophageal cancer Marketed in Canada
- --------------- (1) "Development Phase" refers to the current stage of development of the most advanced indication. See "Business -- Product Development Program" for a more detailed description of the stages of development for these compounds. (2) Targretin Capsules has entered Phase II human clinical trials in diabetes in March 1997 in Europe. (3) Droloxifene is a compound owned by Pfizer. Ligand performed work on droloxifene at Pfizer's request. Ligand and Pfizer entered into a settlement agreement with respect to a lawsuit in April 1996. Under the terms of the settlement agreement, the Company is entitled to receive milestone payments if Pfizer continues development and royalties if Pfizer commercializes the product. See "Business -- Strategic Alliances -- Pfizer Inc." (4) A compound discovered through the Company's collaborative relationship with Pfizer to which Pfizer has retained marketing rights. See "Business -- Strategic Alliances -- Pfizer Inc". (5) In-licensed product. Ligand is conducting human clinical trials with five products. Panretin Capsules, Panretin Gel, Targretin Capsules, Targretin Gel and LGD1550 Capsules are retinoids that may be useful for the treatment of various cancers, such as KS, CTCL, lung and prostate cancer or breast cancer and diseases of the skin and are being developed by Ligand. The Company has completed two pivotal Phase III trials for Panretin Gel in KS to support an NDA which Ligand intends to file in early 1998. The Company has completed two Phase II clinical trials for Panretin Capsules in KS with plans to complete development work and file an NDA in 1999. Ligand is also performing clinical trials for the retinoids Targretin Capsules and Targretin Gel. Interim data from a Phase I/II study of Targretin Gel in CTCL have demonstrated significant activity, and based on discussions with the FDA on trial design, the Company has launched Phase III clinical trials in this indication with Targretin Gel and Phase II/III trials in this indication with Targretin Capsules, each intended to support NDA filings in 1998 or 1999. The Company has received reports on interim findings from the University of Texas M.D. Anderson Cancer Center with respect to certain Phase II/III trials of Targretin Capsules intended to support an NDA in CTCL. See "Business -- Product Development Program -- Retinoids -- Targretin Gel and Targretin Capsules." The Company has launched Phase II/III clinical trials with Targretin 2 4 Capsules in lung cancer. There can be no assurance that the clinical trials will proceed as planned or that any drugs will be successfully developed or commercialized. To date, Ligand has entered into collaborations with eight corporate partners which include, Lilly (for metabolic diseases, including diabetes, obesity, dislipedemia, insulin resistance and cardiovascular diseases associated with insulin resistance and obesity), SmithKline Beecham (for hematopoietic growth factor mimetics for use in oncology and treatment of anemia), AHP (for women's health, e.g., hormone replacement therapy, osteoporosis, fertility control), Abbott (for inflammatory diseases, utilizing selected IR-based approaches), Sankyo (for inflammatory diseases, utilizing selected Glycomed technologies), Glaxo (for atherosclerosis and other diseases affecting the cardiovascular system), Allergan (for oncology and dermatology) and Pfizer (for osteoporosis). These partners provide discovery resources complementary to those of Ligand and are expected to facilitate the development and commercialization of potential products for primary care markets. The collaborative partners have also been an important funding source for Ligand, contributing approximately two-thirds of its invested capital to date. In addition to Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT"), the research and development company formed by Ligand and Allergan, which was funded with net proceeds of $94.3 million to accelerate research and development of certain retinoids ( see "Strategic Alliances -- Allergan, Inc."), Ligand's research activities have been supported by commitments from its partners of up to $141.1 million for research funding. Ligand's collaborative partners have also committed up to $127.8 million of additional equity and convertible notes to Ligand, of which $122.8 million has been received through December 31, 1997, and the remaining $5.0 million is subject to Ligand attaining certain milestones. In September 1997, Ligand exercised its option to purchase all of the 3,250,000 outstanding shares of Callable Common Stock of ALRT at $21.97 per share, the original price applicable for purchase from June 3, 1997 to June 3, 1998. Simultaneously, Allergan exercised its option to acquire an undivided one-half interest in the assets and technologies of ALRT. Certain existing agreements between Allergan and Ligand had provided for joint development and joint commercialization of ALRT compounds following exercise of the buyout option. Allergan and Ligand agreed to amend and restate those agreements so that ALRT compounds and development programs were divided between Allergan and Ligand, and each party received exclusive rights under the ALRT technology for use with their respective compounds and programs. Products and compounds for which Ligand received worldwide rights include Panretin(TM)Gel and Panretin(TM)Capsules, LGD1268, LGD1324 and LGD1550. Allergan received ALRT4310, ALRT326 and ALRT4204 and $4.5 million in cash and rights to future royalties on certain Ligand products. Allergan and Ligand also completed a lottery to divide the approximately 2,000 retinoid compounds remaining in the ALRT compound library as of the ALRT closing date in November 1997. Each party will pay royalties to the other on net sales, if any, of the successfully developed compounds it received directly or in the lottery. See "Business -- Strategic Alliances -- Allergan, Inc." 3 5 BUSINESS STRATEGY Ligand's business strategy is to develop new drugs using its IR and STATs technologies through both internal and collaborative programs. Ligand's internal programs focus on the discovery, development and marketing of small-molecule drugs that address cancer, gynecological diseases and male hormonal imbalances, which are generally treated by medical specialists. An outgrowth of these programs has led to a development program in metabolic disease. Ligand also seeks to in-license or acquire products in these medical specialty markets which are in late-stage clinical development or which have been previously approved by regulatory authorities. Ligand's collaborative programs focus on building a royalty-based business through partnerships with large pharmaceutical companies that apply Ligand's technologies to discover drugs for primary care markets, such as markets for certain cardiovascular, inflammatory, metabolic and other diseases, as well as broad applications for women's and men's health. Ligand's internal efforts have been focused primarily on the discovery and development of improved retinoids, sex steroid receptor agonists and antagonists and cytokine agonists for use in specialty market applications, principally cancer, gynecological disorders and male hormonal imbalances. Products for these specialty markets typically require less resource-intensive clinical trials and can be marketed by a targeted sales force. Ligand has initiated human clinical trials for five products: the retinoids Panretin Capsules, Panretin Gel, LGD1550 Capsules, Targretin Capsules and Targretin Gel. Externally, Ligand is collaborating with large pharmaceutical companies, with the goal of building a royalty-based business through the application of its technologies to primary care markets, broad aspects of women's and men's health, such as cardiovascular, inflammatory, metabolic and other diseases. Ligand has established eight major collaborative arrangements to discover and develop drugs that address disorders principally treated by primary care physicians, specifically hematopoiesis with SmithKline Beecham, women's health disorders with AHP, inflammatory diseases with Abbott, cardiovascular diseases with Glaxo, osteoporosis with Pfizer, oncology and dermatology with Allergan, metabolic disease with Lilly, and inherited a collaboration through the Glycomed merger, with Sankyo in inflammation based on cell adhesion research. Ligand believes its collaborators have the significant resources, including clinical and regulatory experience, manufacturing capabilities and marketing infrastructure, needed to develop and commercialize drugs for these markets. Each of these arrangements provides for collaborative discovery programs funded largely by the corporate partners aimed at discovering new therapies for diseases treated by primary care physicians. In general, drugs resulting from these collaborations will be developed, manufactured and marketed by the corporate partners, with Ligand receiving research revenue during the drug discovery stage, additional milestone revenue for successful compounds moving through clinical development and milestone revenue as well as royalty revenue on sales of drugs marketed by its collaborators. SCIENTIFIC BACKGROUND AND DRUG DISCOVERY OPPORTUNITIES INTRACELLULAR RECEPTORS ("IRS") Hormones are natural chemicals within the body that control important physiological processes, including reproduction and cell growth and differentiation. The known non-peptide hormones are the retinoids, the sex steroids (estrogens, progesterones and androgens), the adrenal steroids (glucocorticoids and mineralocorticoids), vitamin D and thyroid hormone. The understanding of hormones and their actions has increased substantially in the last 10 years. Driving this rapid expansion of knowledge has been the discovery of the family of IRs through which all the known small-molecule (i.e., non-peptide) hormones act. Dr. Ronald Evans at The Salk Institute of Biological Studies ("the Salk Institute"), Ligand's scientific co-founder and exclusive consultant, was the first to clone and characterize an IR in 1985. Since that time, approximately 75 IRs have been defined and characterized, many by Ligand's scientists or its exclusive collaborators. IRs play key roles in a variety of diseases, including certain cancers, gynecological disorders, and cardiovascular, metabolic, inflammatory and skin diseases. Hormones act by binding to their corresponding IRs to regulate the expression of genes in order to maintain and restore balanced cellular function within the body. Hormonal imbalances can lead to a variety of diseases. The hormones themselves and drugs which mimic or block hormone action may be useful in the 4 6 treatment of these diseases. Furthermore, hormone mimics (agonists) or blockers (antagonists) can be used in the treatment of diseases in which the underlying cause is not hormonal imbalance. The effectiveness of the IRs as drug targets has been demonstrated by currently available drugs acting through IRs for many of these diseases. However, the use of most of these drugs has been limited by their often significant side effects. Examples of currently marketed hormone-related drugs acting on IRs are glucocorticoids (steroids used to treat inflammation), estrogens and progesterones (used for hormone replacement therapy and contraception), tamoxifen (an estrogen antagonist used in the treatment of breast cancer), and various retinoids such as Accutane(R) and Retin-A(R) (used to treat acne and psoriasis). Ligand's early recognition of the drug discovery opportunities inherent in emerging IR research has enabled it to build a strong proprietary position and accumulate substantial expertise in IRs applicable to drug discovery and development. Building on its recent scientific findings about the molecular basis of hormone action, Ligand has created proprietary new tools to explore and manipulate non-peptide hormone action for potential therapeutic benefit. The Company has exclusive relationships in the field of IRs with Dr. Ronald Evans, a professor in the Gene Epresion Laboratory of The Salk Institute, and Dr. Bert O'Malley, Professor and Chairman of the Center for Reproductive Biology at Baylor College of Medicine ("Baylor"), where many of the core discoveries in IR research have been made. The Company has exclusively licensed most of these discoveries. Ligand has also developed proprietary IR assays that it believes can rapidly and accurately predict the probable therapeutic and side effect profiles of compounds with potential as drugs. The Company believes that its IR expertise will enable it to discover and develop drugs that have equal or greater therapeutic efficacy and reduced incidence and severity of side effects compared to existing drugs acting through IRs. The Company also believes these drugs will be orally bioavailable. In many diseases, there is an imbalance of cytokine action. For example, some inflammatory conditions may represent excessive actions of certain interleukins or interferons. In these conditions, it may prove beneficial to block the actions of specific cytokines. In other pathological states, there is insufficient activity of specific cytokines. For example, in patients with chronic renal failure, diminished erythropoietin ("EPO") release by the damaged kidneys results in the inadequate production of red blood cells, resulting in anemia. Recombinant human EPO protein (Epogen(R)) can be administered to effectively correct this anemia, but must be injected. Many other cytokines are useful as injected protein medicines, including interferons (Intron-A(R), Roferon(R), Betaseron(R)) interleukins (Proleukin(R), which Ligand markets in Canada), hematopoietic growth factors (Epogen(R), Neupogen(R)) and others. Each of these and many other cytokines appears to exert their actions through JAK/STAT signal transduction pathways. Ligand is utilizing JAK/STAT technology to seek low molecular weight compounds which can mimic or block the actions of medically relevant cytokines for uses in various pathological conditions, including cancer, inflammation and disorders of blood cell formation. Because these are small molecules, whereas the cytokines themselves are proteins, they offer potential significant advantages over current cytokine-based compounds, including oral activity and greater ease of manufacture and improved stability. LIGAND'S IR DRUG DISCOVERY OPPORTUNITIES Ligand and its collaborators have made major discoveries pertaining to IRs and small molecule hormones and compounds which interact with these IRs. These discoveries include: (i) the identification of the IR superfamily, (ii) the recognition of IR subtypes, (iii) the discovery of orphan IRs and (iv) the heterodimer biology of RXR selective compounds. Ligand believes that each of these broad areas of knowledge provides important opportunities for drug discovery. IR Superfamily. The receptors for all the non-peptide hormones are closely related members of a superfamily of proteins known as IRs. The IRs are similar in both structure and mechanisms of action. Human IRs for all of the known non-peptide hormones have now been cloned, primarily by Ligand's scientists or its collaborators, building an understanding of the similar underlying mechanisms of action shared by the non-peptide hormones. Ligand believes that the relatedness of the IRs for the non-peptide hormones has major implications for drug discovery. IRs share a common mechanism of action, which often enables drug discovery insights about 5 7 one IR to be directly applied to other members of the IR superfamily, bringing synergy to Ligand's IR-focused drug discovery efforts. First generation drugs were developed and commercialized for their therapeutic benefits prior to the discovery of IRs and often cross-react with the IRs for hormones other than the intended target, resulting in often significant side effects. The understanding that the IRs are structurally similar has enabled Ligand to determine the basis for the side effects of some first generation drugs and to discover improved drug candidates. IR Subtypes. For some of the non-peptide hormones, several closely related but non-identical IRs, known as IR subtypes, have been discovered. These include six subtypes of the IRs for retinoids and four subtypes of the IRs for thyroid hormone. Patent applications covering most of these IR subtypes have been exclusively licensed by Ligand. Ligand believes that drugs that activate a subset of IR subtypes will allow more specific pharmacological intervention better matched to therapeutic need. Ligand's clinical candidate Targretin was discovered as a result of Ligand's understanding of retinoid receptor subtypes. Orphan IRs. Over 50 additional members of the IR superfamily which do not interact with the known non-peptide hormones or vitamin derivatives have been discovered. Ligand has an exclusive license to patent applications covering many of these orphan IRs. Ligand believes that among the orphan IRs may be receptors for uncharacterized small molecule hormones and that the physiological roles of the various orphan IRs are likely to be diverse. Ligand has devised strategies to isolate small molecules that interact with orphan IRs and is working to identify new orphan IRs as drug targets and to identify their natural and synthetic modulators as possible drug candidates. For example, the RXRs, one subfamily of IRs activated by certain retinoids, were orphan IRs when initially discovered. Panretin was discovered by virtue of its activation of the RXR retinoid receptors. RXR Heterodimer Biology. Retinoids that bind to the RXR family deliver their therapeutic effects through partnered IRs. Recently scientists have discovered that RXRs are obligate partners in these IR pairs through all tissues. These IR pairs consist of one RXR and one of a variety of other IRs, such as RARs, PPARs or thyroid hormone receptors. While RXRs are widely expressed, their IR partners are more discreet, being expressed in selective tissues, such as liver, fat or muscle. As a result, compounds that bind RXRs offer the unique potential to be broadly active compounds that can treat a variety of diseases, including metabolic diseases. In animal models of type II diabetes, RXR agonists appear to stimulate the physiological pathways responsive to RXR-PPAR receptor partners expressed in key target tissues that are involved in glucose metabolism. As a result, a discrete set of genes is activated in these tissues resulting in a decrease in serum glucose levels and insulin. Ligand has established collaborations with major pharmaceutical companies to discover and characterize small molecules to modulate specific IR pathways. LIGAND'S STAT DRUG DISCOVERY OPPORTUNITIES SIGNAL TRANSDUCERS AND ACTIVATORS OF TRANSCRIPTION ("STATS") STATs are a recently discovered family of proteins that are a key part of the signal transduction pathway for a variety of biologically important peptide hormones (e.g., interferons, interleukins, leptin and hematopoietic growth factors) collectively termed Extracellular Signaling Proteins ("ESPs"). STATs play a role in the biology of ESPs functionally analogous to that played by IRs in the biology of the non-peptide hormones: both STATs and IRs are families of transcription factors which change cell function by selectively turning on particular genes in response to circulating signals which impinge on cells. When various cytokines bind to their receptors on the cell surface, this triggers the activation of specific members of the Janus Kinase family of tyrosine protein kinases ("JAKs"), which in turn activate specific STATs. The activated STATs enter the cell nucleus and bind to the control regions of specific target genes and increase their expression, thereby modulating physiologic or pathophysiologic processes. In many diseases, there is an imbalance of cytokine action. For example, some inflammatory conditions may represent excessive actions of certain interleukins or interferons. In these conditions it may prove 6 8 beneficial to block the actions of specific cytokines. In other pathological states there is insufficient activity of specific cytokines. For example, in patients with chronic renal failure, EPO release by the damaged kidneys results in the inadequate production of red blood cells, causing anemia. Recombinant human EPO protein (Epogen) can be administered to correct this anemia effectively, but must be injected. Many other cytokines are useful as injected protein medicines, including interferons (Intron-A, Roferon, Betaseron), interleukins (e.g., Proleukin, which Ligand markets in Canada), hematopoietic growth factors (Epogen, Neupogen) and others. Each of these and many other cytokines appear to exert their actions through JAK/STAT signal transduction pathways. Ligand believes that its JAK/STAT technologies may lead to the discovery of low molecular weight compounds able to mimic or block the actions of medically relevant cytokines for uses in various pathological conditions, including cancer, inflammation and disorders of blood cell formation. Because these compounds are small molecules, whereas the cytokines themselves are proteins, they offer potentially significant advantages over current cytokine-based compounds, including oral bioavailability, greater ease of manufacture and improved stability. The discovery of STATs, the elucidation of their roles in interferon signal transduction, and the first cloning of genes encoding STATs were all accomplished by Ligand's exclusive collaborators, Dr. James Darnell at Rockefeller University and Dr. David Levy at New York University ("NYU"), and were described initially in August 1992. Since then, over half a dozen members of the STAT family have been identified and a large number of ESPs in addition to interferons have also been shown to utilize STAT signal transduction. Among the ESPs which have been shown to use STAT signaling pathways are the interferons (alpha, beta and gamma), the hematopoietic colony stimulating factors (interleukin-3, EPO, G-CSF, GM-CSF and thrombopoietin), many of the interleukins (including IL-2, IL-4, IL-6, IL-12 and IL-13, the related ESPs Oncostatin M and Leukemia Inhibitory Factor), the cytokine leptin and several protein hormones (growth hormone and prolactin). Based on insights into JAK/STAT signal transduction and the generation of the necessary reagents, Ligand has developed STAT technologies for drug discovery which include cell culture-based high throughput screens to identify small molecule drugs and biochemical assays that define where in the JAK/STAT signal transduction pathways the small molecules act. Ligand believes that its JAK/STAT drug discovery technology can produce drug candidates to control gene expression to address a broad range of uses, including treating cancer, providing hematopoietic support for cancer patients undergoing chemotherapy or bone marrow transplantation, combating inflammation and viral or other infections, treating anemia in chronically ill patients (e.g., those with renal failure), treating dwarfism and related disorders of stature and enhancing immune function. Ligand is using its high throughput screening assays to discover small molecule drugs to act as interferon agonists for potential application in various cancers and viral diseases. Ligand has also established a collaboration with SmithKline Beecham to discover and characterize small molecule drugs to modulate specific JAK/STAT pathways to control the formation of red and white blood cells for treating patients with cancer or anemia. Ligand has additional assays under development to allow high throughput screening for and subsequent optimization of small molecule drugs to act through JAK/STAT signaling pathways to block or mimic other medically significant ESPs. GLYCOMED'S COMPLEX CARBOHYDRATES Ligand, through its wholly owned subsidiary Glycomed, is seeking drugs that modulate processes involving complex carbohydrates and other components of the extracellular matrix. The cells in the body are in many cases embedded in various gelatinous or fibrous background substances such as proteins (e.g., collagen) or glycoproteins and mucopolysaccharides (various complex biological polymers containing amino acid and sugar building blocks). This background substance, termed extracellular matrix, can exert important effects on cells, modifying their function and controlling their migration. Additionally, related complex carbohydrates, glycoproteins and mucopolysaccharides are located on the surfaces of cells, where they can 7 9 play important roles in controlling interactions among various cells, including, for example, the attachment of white blood cells to the inner linings of blood vessels, a necessary part of some inflammatory responses. Glycomed has expertise and core technology relating to the biology and chemistry of complex carbohydrates and related components of the extracellular matrix. Ligand is focusing Glycomed's expertise and core technologies to seek small molecule, potentially orally active drugs to modulate the biological processes involving complex carbohydrates and other cell surface and extracellular matrix components for the treatment of inflammation and cancer. One Glycomed compound is Galardin(TM), a matrix metaloproteinase inhibitor in-licensed by Glycomed prior to the Merger. In Phase II/III trials, Galardin(TM) treated patients had significantly lower incidence of corneal perforation. Since the Merger, the Company has sought a partner to further develop the product. Sankyo has Galardin(TM) under development in Phase II trials in Japan for ophthalmic indications. LIGAND'S DRUG DISCOVERY AND DEVELOPMENT PROCESS Ligand's advanced molecular-based IR research focuses on analyzing the biological systems regulated by IRs to choose the most promising molecular targets for drug discovery. After selecting a target, the next critical step in drug discovery is the identification of suitable lead compounds (chemical structures suitable as starting points for optimization as drugs by the application of medicinal chemistry). Traditional drug discovery generally uses animal models or biochemical screening systems for lead compound identification. Animal models are relatively slow, complicated and expensive; and results in animals do not always correlate to those obtained in humans. Biochemical assays are fast and inexpensive, but give limited information and frequently identify poor lead compounds. Ligand has developed a hybrid approach to lead compound identification that retains the best features and avoids the pitfalls of traditional methods to discover leads. Ligand has developed a proprietary cell-culture based assay system for IR-modulating small molecules, referred to as the co-transfection assay, that simulates the actual cellular processes controlled by IRs. The system is (i) fast, compared to animal models; (ii) capable of cost-effective, high throughput screening of thousands of compounds per week; (iii) highly predictive of in vivo pharmacology of both agonists and antagonists; (iv) able to separate complex targets, such as receptor subtypes; and (v) conducted using the actual human receptors which are the ultimate drug targets. Ligand's co-transfection assay is a key component of Ligand's IR drug discovery and development programs, and facilitates both the identification of lead compounds and their optimization as clinical candidates. The co-transfection assay is able to preclinically detect both agonists and antagonists of specific IRs. It determines not only whether a compound interacts with a particular human IR, but also whether this interaction mimics or blocks the effects of the natural regulatory molecules on target gene expression. The Company's assays also enable the Company to detect useful lead compounds which could be missed by alternative biochemical screens or animal models. Ligand has successfully automated its co-transfection assays for high throughput screening of thousands of compounds per week. Ligand's screening in co-transfection assays has resulted in the identification of lead compounds for novel estrogen agonists, non-steroidal progestins and antiprogestins, non-steroidal antiandrogens, non-steroidal glucocorticoid agonists, new retinoid analogues and PPAR agonists that are now undergoing further investigation. Ligand has developed similar automated high throughput assays to identify lead compounds acting as agonists or antagonists of selected JAK/STAT signaling pathways for particular ESPs such as interferons, certain interleukins and selected hematopoietic growth factors. Additional STAT-based screening assays are under development. Once Ligand verifies a lead compound for a particular target, the next critical process is optimization of the compound to achieve specificity and appropriate properties as a drug. Specificity is achieved when the compound interacts only with the intended target molecule and not with related but unintended molecules. Ligand's unique and comprehensive ability to assess compounds preclinically for interactions with all the known human IRs or in various STAT pathways is a significant advantage in obtaining specificity in a lead compound. Optimization of a lead compound is an iterative process in which analogues of the lead compound, designed and synthesized by medicinal chemists, are assayed for activity. The results obtained with each set of 8 10 analogues guide the medicinal chemists in the design of compounds with greater specificity. The co-transfection assay produces results which enhance the accuracy and efficiency of this iterative optimization process. Ligand believes the STAT-based assays may have similar advantages. Ligand believes that its combination of modern molecular and traditional approaches to drug discovery will accelerate its progress to develop new drug candidates. To that end, Ligand has built a strong multidisciplinary team, consisting of molecular biologists, medicinal chemists, pharmacologists and specialists in drug metabolism and distribution, and other pharmaceutical scientists. Ligand believes the similarities between hormone and cytokine mechanisms of action allow it to leverage its drug discovery resources efficiently in the IR and STATs areas. PRODUCT DEVELOPMENT PROGRAM Ligand, as part of its overall business strategy, is developing new drugs through a combination of internal and collaborative programs: (i) internally, by focusing on the discovery, development and marketing of small-molecule drugs that address diseases, such as cancer, gynecological disorders and male hormonal imbalances, treated by medical specialists, and by seeking to in-license or acquire later-stage products in these medical specialties; and (ii) by collaborating with large pharmaceutical companies, with the goal of building a royalty-based business through the application of its technologies to primary care markets, such as markets for certain cardiovascular, inflammatory, metabolic and other diseases, as well as broad applications for women's and men's health. Ligand is currently pursuing five major internally-funded and collaborative drug discovery programs: four are based on specific IRs (the retinoid, sex steroid and glucocorticod receptor programs for cancer, skin and eye disease, metabolic disease, men's and women's health, and inflammatory disease); one is based on STATs; and one is based on Glycomed's inhibitors of cell adhesion technology. Additionally, Ligand has in-licensed and is distributing two anticancer products in Canada for which further indications are being sought. 9 11 The following table summarizes the current status of Ligand's product research, development and marketing programs:
DEVELOPMENT MARKETING PROGRAM DISEASE INDICATION PHASE(1) RIGHTS - --------------------------------------------------------------------------------------------------------- RETINOIDS Panretin Gel (LGD1057)(2) KS Phase III Ligand worldwide Panretin Capsules(2) Cancers, including., KS, MDS, Phase II Ligand worldwide Psoriasis Phase II Ligand worldwide LGD1550 Capsules(2) Cancer Phase I/IIA Ligand worldwide Targretin Gel (LGD1069)(3) CTCL Phase III Ligand worldwide Actinic keratoses Phase II Ligand worldwide Targretin Capsules(4) CTCL Phase II/III Ligand worldwide Lung cancer, breast cancer Phase II/III Ligand worldwide Cancers, including, kidney, Phase II Ligand worldwide prostate, ovarian, KS Psoriasis Phase II Ligand worldwide AGN4310(2) Skin Disorders Development Allergan candidate DIABETES AND METABOLIC DISEASE Targretin Capsules(3) Type II diabetes Phase II Lilly LGD1268 and LGD1324(3) Type II diabetes Development Lilly candidate AGN 4204 and AGN4326 Type II diabetes Preclinical Allergan PPAR Modulators(3) Metabolic and cardiovascular Research Lilly diseases HNF4(3) Metabolic and cardiovascular Research Lilly diseases Ob gene Pathway(3) Metabolic and cardiovascular Research Lilly diseases SEX STEROIDS Droloxifene(5) Breast cancer prevention Phase II Pfizer Osteoporosis Phase II Pfizer Estrogen agonist Osteoporosis Phase II Pfizer (CP336,156)(6) Estrogen antagonist Breast cancer Lead compounds AHP/Ligand(7) selected Progesterone antagonists Cancer, endometriosis, uterine Lead compounds AHP/Ligand(7) (LG1447 series) fibroids selected Progesterone agonists Breast cancer, hormone Lead compounds Ligand (LG2527/2716 series) replacement therapy selected Estrogen agonists Osteoporosis Phase I AHP (TSE424) Tissue selective estrogen or Gynecological disease, Lead compounds AHP/Ligand(7) progesterone agonists and antagonists cardiovascular disease, hormone selected replacement therapy Androgen antagonists Prostate cancer, BPH and Development Ligand worldwide (LGD1331 series) hirsutism candidate Androgen agonists Male hormone replacement Lead compounds Ligand worldwide therapy, osteoporosis selected CARDIOVASCULAR DISEASE Lipid regulators - LDL lowering Atherosclerosis Lead compounds Glaxo selected PPAR modulators Atherosclerosis and other Lead compounds Glaxo disorders affecting the selected cardiovascular system
10 12
DEVELOPMENT MARKETING PROGRAM DISEASE INDICATION PHASE(1) RIGHTS - --------------------------------------------------------------------------------------------------------- INFLAMMATORY DISEASE Glucocorticoid agonists Rheumatoid arthritis, Preclinical Abbott/Ligand(7) inflammatory bowel disease, asthma, dermatitis GLYCOMED INFLAMMATORY DISEASE Galardin (TM) MMPI (GM6001) Ophthalmic inflammation Phase II/III Ligand; Sankyo Matrix metalloproteinase completed in Far East inhibitor ("MMPI")(8) Phase II(9) (opthalmic indications) GM1998 Acute and chronic inflammation Lead compounds Ligand; Sankyo Cell adhesion inhibitors selected in Far East GM1925, GM2296, GM1380 & analogues Acute and chronic inflammation Lead compounds Ligand; Sankyo selected in Far East GM1892 Reperfusion injury Lead compounds Ligand worldwide Endothelial protective agent selected GLYCOMED CANCER GM1474, GM1306 Cancer Lead compounds Ligand worldwide Growth factor modulators selected GM6001 & analogues Cancer Lead compounds Ligand worldwide Matrix metalloproteinase inhibitors selected GM1603 & analogues Cancer Lead compounds Ligand worldwide Heparinase inhibitors selected STATS Interferon agonists Cancer, infectious disease Lead compounds Ligand worldwide identified Interferon antagonists Rheumatoid arthritis, Lead compounds Ligand worldwide inflammatory bowel disease, selected asthma, dermatitis Hematopoietic growth factors Oncological uses, anemia Lead compounds SmithKline selected Beecham/Ligand(7) Other cytokine agonists and Cancer, immunology, growth Lead Compounds Ligand worldwide antagonists control identified IN-LICENSED PHOTOFRIN(R) Esophageal cancer, superficial Market Ligand bladder cancer (Canada only) Proleukin(R) Kidney cancer Market Ligand (Canada only)
- --------------- (1) "Development Phase" refers to the current stage of development of the most advanced indication. "Research" activities include research related to specific IR and STATs targets and the identification of lead compounds. "Lead compounds" are chemicals that have been identified that meet preselected criteria in cell culture models for activity and potency against IR or STATs targets. More extensive evaluation is then undertaken to determine if the compound should be selected to enter into preclinical development. Once lead compound is selected, chemical modification of the compound is then undertaken to create the best drug candidate. "Preclinical" includes pharmacology and toxicology testing in preclinical models (in vitro and in vivo), formulation work and manufacturing scale-up to gather necessary data to comply with applicable regulations prior to commencement of human clinical trials. "Development candidates" are lead compounds that have successfully undergone in vitro and in vivo evaluation to demonstrate that they have an acceptable profile which justifies taking them through preclinical development with the intention of filing an IND and initiating human clinical testing. Clinical trials are typically conducted in three sequential phases that may overlap. In "Phase I," the initial introduction of the pharmaceutical into healthy human volunteers, the emphasis is on testing for 11 13 safety (adverse effects), dosage tolerance, metabolism, distribution, excretion and clinical pharmacology. "Phase II" involves studies in a limited patient population to determine the efficacy of the pharmaceutical for specific targeted indications, to determine dosage tolerance and optimal dosage and to identify possible adverse side effects and safety risks. Once a compound is found to be effective and to have an acceptable safety profile in Phase II evaluations, "Phase III" trials are undertaken to evaluate clinical efficacy further and to further test for safety within an expanded patient population at multiple clinical study sites. Sometimes Phase I and II trials or Phase II and III trials are combined. The FDA reviews both the clinical plans and the results of the trials and may discontinue the trials at any time if there are significant safety issues. (2) In connection with the exercise of the buyback of ALRT and the exclusive licensing arrangement with Allergan (See "Strategic Alliances -- Allergan, Inc."), Ligand acquired the exclusive right to develop and commercialize Panretin Capsules and Panretin Gel, LGD1550, LGD1268 and LGD1324. In addition, Ligand and Allergan participated in a lottery for each of the approximately 2,000 retinoid compounds existing in the ALRT compound library, with each party acquiring exclusive, worldwide development, commercialization and sublicense rights to the compounds which they selected. Allergan acquired rights to ALRT4310, ALRT4204, ALRT4326 and acquired rights to selected RARa agonists. (3) In connection with the strategic alliance with Lilly described in "Strategic Alliance -- Eli Lilly and Company," Lilly will receive worldwide, exclusive rights to Targretin (LGD1069), other Ligand compounds and technology associated with the RXR receptor, HNF4, PPAR modulators and the ob gene pathway in all fields other than cancer and dermatology. (4) Targretin Capsules entered Phase II human clinical trials in diabetes in March 1997 in Europe. (5) Droloxifene is a Pfizer compound. Ligand performed work on droloxifene at Pfizer's request. Ligand and Pfizer entered into a settlement agreement with respect to a lawsuit in April 1996. Under the terms of the settlement agreement, the Company is entitled to receive milestones if Pfizer continues development and royalties if Pfizer commercializes the product. See "Strategic Alliances -- Pfizer Inc" (6) A compound discovered through the Company's collaborative relationship with Pfizer to which Pfizer has retained marketing rights. Ligand is awaiting confirmation from Pfizer. There can be no assurance that clinical trials will proceed as planned or that any new drugs will be successfully developed. See "Strategic Alliance -- Pfizer Inc" and "Government Regulation." (7) Ligand has retained certain compound rights. See "Strategic Alliances -- American Home Products Corporation." (8) Ligand is seeking a partner to further the development and commercialization of Galardin for ophthalmic use. See "Inflammatory Disease." (9) Phase II trials ongoing in Japan. 12 14 RETINOIDS Retinoic acid, a derivative of Vitamin A, is one of the body's natural regulatory hormones and has a broad range of biological actions, influencing cell growth, differentiation, apoptosis and embryonic development. Many chemical analogues of retinoic acid, also called retinoids, also have biological activity. Specific retinoids have been approved by the FDA for the treatment of psoriasis and certain severe forms of acne. Evidence also suggests that retinoids can be used to arrest and, to an extent, reverse the effects of skin damage arising from prolonged exposure to the sun. Other evidence suggests that retinoids are useful in the treatment of a variety of cancers, including kidney cancer and certain forms of leukemia. For example, all-trans-Retinoic-acid ("ATRA") has been approved by the FDA for the treatment of acute promyelocytic leukemia ("APL"). Retinoids have also shown an ability to reverse precancerous (premalignant) changes in tissues, reducing the risk of development of cancer, and may have potential as preventive agents for a variety of epithelial malignancies, including skin, head and neck, bladder and prostate cancer. Recent scientific articles by Ligand researchers have described the potential of RXR selective retinods in metabolic disease. Despite the therapeutic benefits of currently marketed retinoids, their use to date has been limited by their propensity to cause significant side effects, such as severe birth defects if fetal exposure occurs, severe irritation of the skin and mucosal surfaces, elevation of plasma lipids, headache and skeletal abnormalities. Currently marketed retinoids were developed and commercialized for their therapeutic benefits prior to the discovery of retinoid-responsive IRs ("RRs"), and were developed with suboptimal tools. The six RRs that have been identified to date can be grouped in two subfamilies: Retinoic Acid Receptors ("RARs") and RXRs. Patent applications covering members of both families of RRs have been licensed exclusively to Ligand primarily from The Salk Institute. The RR subtypes appear to have different functions, based on their distribution in the various tissues within the body and data arising from in vitro studies and from studies of transgenic mice. Several of the retinoids currently in commercial use are either non-selective in their pattern of RR subtype activation or are not ideal drugs for other reasons. Ligand, is developing chemically synthesized retinoids which, by selectively activating RR subtypes, may preserve desired therapeutic effects while reducing side effects. Because of their subtype selectivity or other desirable activities, Ligand's retinoid agonists are expected to have more specific pharmacological effects and fewer side effects, thus providing a better therapeutic index than currently used retinoids, many of which are not RR subtype specific or are suboptimal for other reasons. Ligand, has five retinoid products in clinical trials, Panretin Gel, Panretin Capsules and LGD1550 Capsules, Targretin Gel and Targretin Capsules, and five retinoid compounds in advanced preclinical evaluation through its corporate partners. Ligand and Allergan also participated in a lottery for each of the approximately 2,000 retinoid compounds existing in the ALRT compound library with each party acquiring exclusive, worldwide development, commercialization and sublicense rights to the compounds selected. In September 1997, Ligand and Allergan agreed to restructure the terms and conditions relating to research, development, commercialization and sublicense rights for the ALRT compounds in the period following the closing of the exercise of Ligand's Stock Purchase Option and Allergan's Asset Purchase Option. See "Strategic Alliances -- Allergan, Inc." In November 1997, Ligand and Lilly entered into a strategic alliance for the discovery and development of products based on Ligand's IR technology. See "Strategic Alliances -- Eli Lilly and Company, Inc." Panretin Gel. 9-cis-Retinoic acid (Panretin) is a non-peptide hormone isolated and characterized by Ligand in 1991 in collaboration with scientists at The Salk Institute and Baylor. This is the first non-peptide hormone discovered in over 25 years and appears to be a natural Ligand for the RAR and RXR subfamilies of retinoid receptors. 9-cis-Retinoic acid has pharmacological properties which Ligand believes give it therapeutic utility. In June 1994, Ligand initiated a Phase I/II human clinical trial for Panretin Gel in AIDS-related, cutaneous KS. Interim results of this Phase I/II clinical trial reported in January 1996 showed that, when evaluated at 12 weeks after the start of each patient's therapy, Panretin Gel induced a partial or complete 13 15 clinical response in 30% of 43 patients with AIDS-related, cutaneous KS evaluated by AIDS Clinical Trial Group ("ACTG") criteria as applied to topical therapy, compared with 9% of patients with untreated control lesions. This interim assessment supported results of an earlier assessment reported in September 1995. Final results of this Phase I/II clinical trial involving 115 patients were reported in December 1996 and were consistent with the interim data. Following positive Phase I/II interim results and a meeting with the FDA in November 1995, Ligand launched of 1996, a pivotal Phase III study in North America to evaluate Panretin Gel in over 200 patients with AIDS-related, cutaneous KS in the second quarter. In addition, Panretin Gel began international Phase III trials for KS in the third quarter of 1996. In January 1997, the Company reported an interim assessment of the control (placebo) response. Based on the first 100 patients, the control response was equal to or below 10% which would permit the statistical power of the study to be maintained without expanding the patient sample size. However, the Company decided to enroll an additional 35 patients which will add time to the accrual process but should not impact the targeted NDA filing date. In August 1997, the Company reported that the international Phase III trial of Panretin Gel was stopped early in August 1997 at 82 KS patients because an interim analysis specified in the protocol revealed a 42% (15 of 36 patients) response in patients treated with Panretin Gel compared with a 7% (3 of 46 patients) response of patients treated with a placebo. The trial conducted at approximately 30 centers internationally and, permitted its early conclusion if a significant number of patients were receiving clear benefit from Panretin Gel treatment. In December 1997, the company reported that the North American Phase III pivotal trial for Panretin Gel in KS patients showed a 35.1% (47 of 134 patients) response in patients treated topically with Panretin Gel compared to 17.9% (24 of 134 patients) using a placebo gel with no active drug. The North American study, which began in April 1996, included more than 30 sites with 269 patients -- 135 in the Panretin Gel group and 134 in the placebo group. Patients in the Panretin Gel group had the option of continuing treatment after the blinded portion of the study was complete. For patients initially assigned to Panretin Gel and then continuing on the drug therapy, the response rate increased to 49.3% (66 of 134 patients). Of the 85 patients who initially received placebo and then elected to use Panretin Gel after the blinded phase, 29.4% (25 of 85) showed a complete or partial response. The Company believes that these two Phase III trials should be sufficient to support a favorable clinical review of the NDA targeted for submission early in 1998. Panretin Capsules. In completed Phase I/IIA human clinical trials, Panretin Capsules were well tolerated at doses as high as 140 mg/m(2)/day (milligram per square meter of body surface, per day), the maximum tolerated dose ("MTD"). At the MTD level, side effects, including headaches, elevated triglyceride levels, hypercalcemia and mucocutaneous irritation, were dose limiting toxicities. Memorial Sloan-Kettering Cancer Center ("Sloan-Kettering") interim data indicate that nine of 39 patients with advanced or otherwise untreatable cancer treated with Panretin Capsules experienced no disease progression for periods ranging from 14 to 28 weeks. The Phase I/IIA clinical data also indicate that Panretin Capsules have good bioavailability. Patient exposure to Panretin Capsules is proportional to the administered dose of the compound over a broad range of doses. United States and international Phase II trials have been launched with Panretin Capsules in a number of cancer indications, including kidney cancer (in combination with interferon alpha), ovarian cancer (with cis-platin), KS, prostate cancer, non-Hodgkin's lymphoma and multiple myeloma. In June 1997, kidney cancer, non-Hodgkin's lymphoma and multiple myeloma trials were discontinued due to insufficient activity. A Phase III trial with Panretin Capsules at a dose of 140 mg/m(2)/day in APL was initiated in the fourth quarter of 1996. In September 1997, the final analysis of a Phase I/IIA trial of Panretin Capsules in APL showed that 4 of 5 newly diagnosed patients achieved complete remission and 4 of 12 relapsed patients also experienced complete remission. The FDA approved an application by Ligand, to have Panretin Capsules designated an "Orphan Drug" for the treatment of APL. In February 1998, the Company announced the restructure of the slowly accruing APL program by terminating the ongoing Phase III studies. Panretin Capsules entered a Phase II trial for psoriasis in the United States in September 1995, a Phase II trial for myelodysplastic syndrome in Europe in the second quarter of 1996 and a Phase II trial for proliferative vitreo-retinopathy, 14 16 which was discontinued in July 1997 due to inability to accrue patients in this small patient population. In July 1997, the Company reported interim results of a Phase II study for Panretin Capsules in KS showing that Panretin Capsules has an acceptable safety profile and a sufficient number of positive responders to continue full accrual of the trial by the Aids Malignancy Consortium. In February 1998, Ligand announced favorable results in two Phase II trials with Panretin Capsules in patients with KS. The two studies were similar in design, with one conducted by the AIDS Malignancy Consortium ("AMC") sponsored by the National Cancer Institute ("NCI") and the other conducted directly by Ligand. In the studies, Panretin Capsules were administered once daily at doses increasing from 60 mg/m(2) to 100 mg/m(2)/day. Study participants had to have biopsy proven KS associated with AIDS and at least five to six skin lesions that were assessed every two weeks for response. Response was determined by applying standard ACTG criteria for complete and partial response based on the indicator lesions. The protocol-defined evaluation period was 16 weeks. The study conducted by the AMC has enrolled 66 patients at eight sites. The overall response rate at final analysis through the 16-week evaluation period for patients meeting the criteria for evaluation was 38% (19 of 50) including one complete responder. Drug side effects were generally manageable, with some patients requiring dose reductions with headache, dry skin, rash, alopecia, peeling/flaking and hyperlipidemia as the most common events. The study conducted by Ligand enrolled 57 patients at five study centers. The overall response rate for all patients (21 of 57) was 37%, and for patients who met the protocol defined criteria for evaluation, the overall response rate was 57% (21 of 37). One patient demonstrated a complete response. Almost all patients were on highly active antiretroviral therapy (HAART), including at least one protease inhibitor, prior to the start of Panretin Capsules therapy. The side effect profile was similar to that in the AMC study. A 50-patient Phase II trial of Panretin Capsules in psoriasis has been completed and Panretin Capsules appear to be well-tolerated in patients with moderate to severe plaque psoriasis. In this study, 50% (5 of 10 patients) who received the optimal dose level of 0.9 mg/kg administered daily, achieved a 50% or greater improvement based on the Physician's Global Evaluation. There is currently substantial interest among oncologists in the potential of retinoids, as evidenced by the existence of over 60 open protocols at the NCI to examine the effects of retinoids on a variety of cancers. A Phase I/II study is currently being conducted by the NCI to evaluate the safety and efficacy of Panretin Capsules in children with malignancies, and the Phase II trials are underway sponsored by the NCI to evaluate the safety and efficacy of Panretin Capsules in patients with lung cancer, cervical cancer and those with breast cancer. LGD1550 Capsules. A very potent RAR agonist, LGD1550 Capsules strongly inhibits growth of several human cancer cell lines. In the fourth quarter of 1996, Ligand submitted an IND. Phase I/IIA Clinical Trials in advanced cancer began at Sloan-Kettering and Lombardi Comprehensive Cancer Center at Georgetown University ("Lombardi Cancer Center") in the first quarter of 1997. Other former ALRT Compounds. ALRT's drug development pipeline included seven additional retinoid compounds in preclinical evaluation. These included: (i) ALRT4310 and analogues, RAR antagonists for topical use to ameliorate mucocutaneous irritation accompanying therapy for cancer or skin disease with systemic retinoids such as Accutane, Vesanoid and Oral Panretin, (ii) ALRT1455 and analogues, RAR-alpha-selective retinoids for possible use in treating leukemias, lymphoma, and breast cancer; (iii) RXR-selective retinoids, including ALRT268 and ALRT324 with possible utilities in various metabolic disorders such as diabetes mellitus; and (iv) four additional retinoid receptor selective compounds with possible utilities in various cancers and skin disease. Ligand and Allergan participated in a lottery for each of the approximately 2,000 retinoid compounds in the ALRT compound library with each party acquiring exclusive, worldwide development, commercialization and sublicense rights to compounds selected. Targretin Topical Gel and Targretin Capsules. Ligand has created synthetic retinoids that show distinctive patterns of RR subtype selectivity. Ligand's research indicates that one of these retinoids, Targretin, has a beneficial effect in squamous epithelial growth, showing activity with human skin cells in 15 17 culture and in a preclinical model of psoriasis. Targretin , which is the first RXR-selective retinoid in clinical development, has shown anti-cancer activity in vitro and in vivo preclinically. Because Targretin has attractive preclinical effects to induce programmed cell death (apoptosis) in cancer cell lines, Ligand believes it may have utility in solid tumors, such as breast, colon or lung cancer, which grow relatively slowly and therefore respond poorly to conventional cytotoxic chemotherapeutic agents. In vivo preclinical data indicate that Targretin is orally and topically active and well tolerated. Ligand's research indicates that Targretin has a pattern of RR subtype activation distinct from that of Panretin. In June 1994, Ligand initiated Phase I/II clinical trials in patients with a form of skin lymphoma or with cutaneous KS with Targretin Gel. In interim data presented by investigations from the University of Cincinnati in March 1997, Targretin Gel induced responses in 43% of 48 evaluable patients with cutaneous T-cell lymphoma ("CTCL"). In January 1996, the Company presented interim data which showed that Targretin Gel induced responses in 15% of 46 patients with AIDS-related KS, a result which confirmed earlier interim results presented in September 1995. The Company met with the FDA on trial design and in late 1996 and early 1997 initiated three Phase II/III and pivotal Phase III clinical trials in CTCL; two studies with Targretin Capsules and one with Targretin Gel. In September 1997, researchers from the University of Texas M.D. Anderson Cancer Center reported on interim findings with respect to two Phase II/III pivotal trials of Targretin Capsules. Forty-one percent of early and advanced stage CTCL patients who had been refractory or intolerant to prior therapy and then received higher dose Targretin capsules achieved a complete or partial response compared to none of a group of early stage patients who received a lower dose of Targretin capsules. Ligand initiated clinical trials for Targretin Capsules for cancer indications in January 1994. Phase I/IIA trials in patients with advanced cancer were conducted at centers including Sloan-Kettering and the Lombardi Cancer Center. These studies were designed to gather human safety data and to determine the maximum tolerated dose of Targretin Capsules to facilitate design of Phase IIB and later studies. Phase I/IIA interim trial results of Targretin Capsules were presented by Sloan-Kettering investigators at ASCO in May 1995. The Sloan-Kettering team reported on 33 patients with various cancers treated at oral daily doses up to 140 mg/m(2)/day. No dose limiting toxicities were reported in the study and investigators reported that the bioavailability of the drug is excellent. In April 1996, clinical investigators reported stabilization of disease in many of their patients with non-small cell lung cancer ("NSCLC"). Investigators from the Lombardi Cancer Center reported eight of 15 lung cancer patients with stable disease in excess of three months. Investigators at Sloan-Kettering reported that eight of 20 lung patients demonstrated stabilization of disease for three to eight-plus months. Lombardi Cancer Center investigators reported results of an ongoing Phase I-IIa human clinical trial on Targretin Capsules at the annual meeting of the American Association for Cancer Research and investigators from Sloan-Kettering reported results of a closed Phase I-IIa human clinical trial of Targretin Capsules at the NCI and European Organization for Research and Treatment of Cancer Symposium on New Drugs in Cancer Therapy. In September 1997, the Company announced that 41% of early and advanced stage CTCL patients who had been refractory or intolerant to prior therapy and then received higher dose Targretin Capsules achieved a complete or partial response. For the group of early stage CTCL patients, 37% who received higher dose Targretin Capsules achieved complete or partial response compared to none of the patients who received a lower dose of Targretin Capsules. Findings for patients with advanced stage CTCL who received higher dose Targretin Capsules showed 43% response. None of the advanced stage patients received lower dosed Targretin Capsules. The interim findings of the first 35 patients enrolled in these two multicenter Phase II/III trails were based on the Physicians' Global Assessment of Response provided in the protocol. CTCL is a debilitating cancer characterized initially by skin lesions that can affect more than 50% of a person's skin surface, making day-to-day living painful and difficult. Eventually, the disease becomes visceral and life threatening. The safety profile of Targretin Capsules remains favorable. The drug also has displayed milder side effects than those often seen with other retinoids, and it appears to be well-tolerated at doses which are clinically active. Phase I/IIA studies are continuing. A Phase II/III clinical trial has begun in lung cancer, Phase II clinical trials have begun in KS, ovarian cancer, head and neck and prostate cancer, and a Phase II clinical trial has begun in kidney cancer (in combination therapy with interferon alpha). Preclinical studies conducted with RXR-selective retinoids such as Targretin Capsules indicate possible utilities in breast cancer and metabolic disorders such as diabetes mellitus. Preclinical studies conducted in 16 18 1996 in mouse models of human type II diabetes, a subset of diabetes mellitus, and obesity demonstrated the ability of Targretin to decrease blood glucose, triglyceride and insulin levels. In a rat model of breast cancer prevention conducted in 1996, Targretin reduced incidence and tumor frequency at least as well as an estrogen antagonist compared to control, without the undesirable reduction in mean body weight produced by the estrogen antagonist. In February 1998, the Company announced that Targretin caused complete regression in 72% of established breast cancer tumors in one of the most commonly used rat models of this disease, according to a study published by scientists from Ligand in the journal Cancer Research. The study is the first to compare the treatment potential of Targretin and tamoxifen both individually and in combination therapy. The use of tamoxifen alone resulted in complete regression in 33.3% of tumors, compared to Targretin's rate of regression in 72% of tumors. Tamoxifen is currently the most widely prescribed breast cancer therapy. A Phase II multicenter trial in type II diabetes in Europe was initiated with Targretin Capsules in the first quarter of 1997. The clinical studies have two main objectives: to study the safety and tolerability of different dose levels of Targretin in type II diabetic patients and to determine the potential for this RXR agonist to have positive metabolic effects on carbohydrate and/or lipid metabolism in this population. Ligand initiated a significant collaboration in metabolic disease, including type II diabetes, in November 1997 with Lilly and future development of Targretin in metabolic disease is now a part of that collaboration. In addition, as part of the restructured Ligand-Allergan arrangement, Ligand will pay to Allergan a royalty based on Ligand's net sales of Targretin for uses other than oncology and dermatology indications; in the event that Ligand licenses commercialization rights to Targretin to a third party, Ligand will pay to Allergan a percentage of royalties payable to Ligand with respect to sales of Targretin other than in oncology and dermatology indications. SEX STEROIDS The primary objective of Ligand's sex steroid program is to define agonists, partial agonists and antagonists of the sex steroid receptors as drugs for hormonally responsive cancers of men and women, hormone replacement therapies and the treatment and prevention of diseases affecting women's health as well as hormonal disorders prevalent in men. Ligand's programs in the sex steroid areas target (i) development of tissue-selective modulators of the progesterone receptor ("PR") and estrogen receptor ("ER") for uses including various chronic disease indications and (ii) the development of androgen receptor ("AR") agonists and antagonists for use in cancer and other indications. Lead compounds have been identified in each of these project areas. Substantial medicinal chemistry efforts have yielded compounds active in animals as PR and AR modulators. Ligand is pursuing these programs alone and in collaboration with certain partners. In the research phase of a collaboration with Pfizer, an advanced clinical compound in breast cancer and osteoporosis was evaluated and potentially attractive ER modulators were identified as development candidates and backup candidates. In a collaboration with AHP, several advanced sex hormone receptor modulators are progressing in preclinical evaluation with one scheduled for an IND in the first quarter of 1998. Ligand has filed a patent application on fundamental advances made in understanding sex steroid receptor function with significant drug discovery implications. Progesterone Receptor Antagonists and Agonists. The objective of this program is to develop novel PR antagonists, partial agonists and agonists for chronic therapies. As part of this program, Ligand is also pursuing PR agonists and partial agonists with related chemical structures for use in hormone replacement therapy, breast cancer, contraception and other applications in women's health. Exploratory clinical research indicates that PR antagonists may have utility in a variety of chronic diseases, including endometriosis and cancer. Although PR antagonists currently are used clinically for acute indications, their use in chronic diseases is likely to be limited by their cross-reaction with the glucocorticoid receptor, which is anticipated to produce adverse side effects with chronic administration. Ligand believes that more selective PR antagonists will be useful in the treatment of many hormone responsive diseases, including gynecological and malignant disorders, such as breast and uterine cancer, uterine fibroids (benign smooth muscle tumors) and endometriosis. Because of the very close structural similarity of the IRs for progesterone and glucocorticoids, it has proven difficult to find noncross-reactive compounds. This has been made even 17 19 more difficult because medicinal chemists have been largely constrained to steroid structures as lead compounds. Ligand believes that it has an opportunity, based on its proprietary tools and approaches, to develop a specific PR antagonist that does not cross-react with the IR for glucocorticoids. Ligand has discovered several nonsteroidal lead compounds that are PR antagonists. Ligand has also discovered closely related compounds that are full agonists of the PR, which may be useful in breast cancer, contraception and hormone replacement therapy. These lead compounds were detected in Ligand's natural product and defined chemical screening programs using the co-transfection assay and the cloned human PR. Medicinal chemistry efforts at Ligand based on one of these non-steroidal antiprogestin leads have yielded potent, selective compounds with demonstrable antiprogestin pharmacological effects both in vitro in human breast cancer cells and in vivo in rodents. In January 1996, AHP exercised its option to include compounds that Ligand had discovered that modulate PRs and to expand the collaboration to encompass the treatment or prevention of osteoporosis through the ER. Ligand's proprietary PR modulators added to the collaboration include three series: LG1447 PR antagonists, and LG2527 and LG2716 PR agonists. In 1997, Ligand regained rights to progesterone agonists (LG2527 and LG2716) in the AHP collaboration. In May 1996, AHP expanded the collaboration further to include four advanced chemical compound series from the Wyeth-Ayerst internal ER-osteoporosis program. See "Tissue Selective Estrogen and Progesterone Agonists." Estrogen Agonists. Osteoporosis is a disease characterized by significant loss of bone mass. The disease, which predominantly affects post-menopausal women, leads to a greater susceptibility to traumatic bone fractures and can lead to curved spine ("dowager's hump") or hip fractures in elderly women. The disease is ordinarily treated by giving women therapeutic doses of estrogen or other steroidal analogues of estrogen. Estrogen therapy is a suboptimal treatment of the disease because of significant side effects, including an increased risk of developing uterine cancer. Estrogen therapy is not well tolerated, and over 60% of women abandon the therapy within the first year. Nevertheless, the market for estrogen therapy in the United States alone exceeds $850 million annually and is estimated by Ligand to approximate $1.4 billion worldwide. The objective of the collaboration between Ligand and Pfizer was to discover and develop novel therapies for osteoporosis acting through IRs. The program focused on estrogen agonists that have greater tissue specificity for bone than current forms of estrogen replacement therapy. In November 1993, Ligand and Pfizer announced the successful completion of the research phase of their alliance with the identification of a development candidate and backups for the prevention and treatment of osteoporosis. In preclinical studies, the candidates from the program mimic the beneficial effects of estrogen on bone (stabilization of bone mineral density and skeletal integrity) and have an impact on serum lipids often associated with cardioprotection without increasing uterine or breast tissue proliferation. Tissue Selective Estrogen and Progesterone Agonists. In addition to the effects of estrogens and progesterones on the reproductive system, estrogens exert a number of other influences in the body, including beneficial effects on the cardiovascular and skeletal systems. After menopause, replacement of lost estrogens is effective but not well tolerated due to adverse side effects. Building on insights emerging from its research, Ligand believes that it has developed a novel approach to achieving tissue selective estrogen or progesterone agonist action. Ligand's approach is not dependent on the existence of receptor subtypes, although subtypes have been demonstrated for the ER and PR which may offer other drug discovery opportunities. Ligand has designed and implemented novel screens which Ligand believes will detect sex steroid receptor agonists with desirable pharmacological profiles. Ligand believes that these compounds will be useful in treating a variety of hormone-responsive diseases, such as endometriosis, uterine fibroids and cancers of the uterus and breast. Additionally, Ligand believes that the compounds emerging from this program can be used in reproductive medicine and hormone replacement therapy. In September 1994, Ligand entered into a collaboration with AHP in the area of ER and PR modulators for use in women's health. The objective of this collaborative program is to discover and develop drugs which interact with the ER or PR to produce tissue-selective actions. An important additional aspect of this collaboration is Ligand's right to assay AHP's extensive chemical library for activity against a selected set of 18 20 targets of Ligand's internal programs. Ligand may select up to 24 lead compounds for internal development to which Ligand has worldwide rights. AHP has agreed to provide up to $21.5 million in research funding to support up to 18 Ligand scientists during the term of the collaboration. The first potential clinical product of the AHP collaboration is a tissue selective estrogen modulator called TSE424. In 1997, AHP announced its intention to file an investigational new application (IND) and begin clinical trials for this selective estrogen agonist in osteoporosis in the first quarter of 1998. A second potential clinical candidate may be designated for an IND track for reproductive cancer in early 1998. Androgen Receptor Agonists and Antagonists. The primary objective of this project is to develop novel AR agonists or antagonists for male hormone replacement therapy and the treatment of skin disorders, osteoporosis, prostate cancer and other diseases. The growth of most prostate cancers appears to be stimulated by or dependent upon androgens. The use of androgen antagonists has shown efficacy in the treatment of prostate cancer. Currently, the FDA has approved two androgen antagonists for use in the treatment of prostate cancer and a third is in clinical development. None of these are Ligand compounds. These agents appear to have significant side effects. Ligand believes that there is a substantial medical need for improved androgen modulators for use in the treatment of prostate cancer. AR agonists and antagonists with an improved side effect profile may also provide utility in the treatment of benign prostatic hypertrophy, acne, hirsutism, male-pattern baldness and cachexia associated with chronic disease (e.g., cancer, auto-immune disorders and AIDS). Ligand has exclusively licensed patent applications for the cloned human AR and is employing it to identify novel AR agonists and antagonists. Ligand has identified non-steroidal lead compounds from its internal screening programs. An internally directed medicinal chemistry effort has produced potent, selective, patentable AR agonists and antagonists which show pharmacological activity in vivo in rodents. Compounds from these series are being optimized and will be further evaluated as potential preclinical candidates. Ligand intends to pursue the specialty applications emerging from these projects internally, but may seek a collaboration with a pharmaceutical company to exploit broader clinical applications. Ligand researchers have identified an orally available, non-steroidal androgen receptor antagonist, LGD1331, which preclinical studies indicate may have utility for treating hirsutism, a disorder that affects a significant number of women, prostate cancer, balding in men and benign prostatic hyperplasia. In vivo studies of LGD1331 have revealed very favorable characteristics, including dramatically diminished effects on the central nervous system, compared with currently marketed drugs of this type for the treatment of these conditions. This antagonist is also being evaluated for its systemic and topical utility in the treatment of acne. CARDIOVASCULAR/METABOLIC DISEASE Ligand scientists are exploring the role of certain orphan IRs in disorders affecting the cardiovascular system. Data suggest that these receptors regulate the expression of apolipoprotein A1 ("ApoA1"). ApoA1 is the major protein constituent of high-density lipoprotein ("HDL"), and recent data link increased levels of ApoA1 to prevention of atherosclerosis. Another subfamily of orphan IRs, PPARs, have been implicated in lowering plasma levels of very low density lipoproteins and triglycerides. Data implicate PPARs in the mechanism of action of lipid lowering drugs such as Lopid(R). Ligand has discovered three subtypes of this PPAR class and defined novel aspects of their action. The subtype PPAR alpha appears to regulate the metabolism of certain lipids. PPAR alpha agonists may be useful to treat atherosclerosis and diabetes mellitus. PPAR gamma plays roles in fat cell differentiation and cellular responses to insulin. Modulators of PPAR gamma activity (e.g., the glitazone class of insulin sensitizers) may have utilities in the management of diabetes mellitus and/or obesity. PPARs function in cells with RXRs as partner proteins. In addition to compounds that act directly on PPARs, which may have utility in various cardiovascular and metabolic disorders, certain retinoids able to activate RXRs (e.g., Targretin Capsules and LGD1268) and indirectly activate PPARs may also have utilities in these disorders. Preclinical animal studies have demonstrated that Targretin Capsules have beneficial effects in animal models of diabetes. 19 21 Ligand has established sophisticated high throughput assays to screen for drug selectivity associated with structural classes of thyroid hormone receptors to identify compounds which could selectively mimic the thyroid hormone's cardioprotective lipid lowering effects without its impact on heart rate and nervous system activity. In September 1992, Ligand entered into a collaboration with Glaxo to discover and develop drugs for the prevention or treatment of atherosclerosis and other disorders affecting the cardiovascular system. In collaboration with Glaxo, Ligand worked to discover drugs which produce beneficial alterations in lipid and lipoprotein metabolism in projects focused on (i) regulation of cholesterol biosynthesis and expression of a receptor which removes cholesterol from the blood stream, (ii) the IRs influencing circulating ADL levels, and (iii) PPARs, the subfamily of IRs activated by the clofibrate class of lipid lowering drugs, Lopid and Atromid-S. The collaboration with Glaxo has also identified a novel lead structure that activates selected PPAR subfamily members. Ligand and Glaxo have screened compounds to identify potential lead compounds. A lead compound showing in vivo activity in rodents has been selected for lowering low-density lipoprotein ("LDL") cholesterol by up-regulating LDL receptor gene expression in liver cells. Once leads are identified, Glaxo has primary responsibility for pharmacology, medicinal chemistry to optimize the drug candidates, preclinical testing and for conducting clinical trials of the drug candidates for marketing approval by the FDA and certain other regulatory agencies. The research phase of the collaborative research agreement was completed in September 1997. In November 1997, the Company and Lilly entered into a strategic alliance for the discovery and development of products based upon Ligand's IR technology. The collaboration focuses on products with broad applications across metabolic diseases, including diabetes, obesity, dislipidemia, insulin resistance and cardiovascular diseases associated with insulin resistance and obesity. Under the alliance Lilly received worldwide, exclusive rights to Targretin and other Ligand compounds and technology associated with the RXR receptor. Lilly received additional rights to use Ligand technology to develop an RXR compound in combination with a SERM in cancer. Ligand retains exclusive rights to independently research, develop and commercialize Targretin and other RXR compounds in the fields of cancer and dermatology. Lilly also received worldwide, exclusive rights in certain areas to Ligand's PPAR technology, along with rights to use PPAR research technology with the RXR technology. Lilly and Ligand also intend to begin research programs aimed at discovering novel compounds which therapeutically activate PPAR subtypes for treatment of cardiovascular disease. Finally, Lilly received exclusive rights to Ligand's HNF4 receptor and the obesity gene promoter technology. Ligand has the option to obtain selected rights to one Lilly specialty pharmaceutical product. The product would fit into a current area of strategic focus for Ligand. Should Ligand elect to obtain selected rights to the product, Lilly could receive milestones of up to $20 million in Ligand stock. In the event that Ligand does not exercise this product option, Ligand could sell an additional $20 million in equity to Lilly at a 20% premium to the then market price, and Ligand would qualify for certain additional royalties of up to 1.5% on net sales of Ligand's choice of Targretin, LGD1268 or LGD1324. Ligand will receive double-digit royalties on net sales of the most advanced products and single-digit royalties on net sales of earlier compounds. Ligand will also receive milestones, royalties and options to obtain certain co-development and co-promotion rights for the Lilly-selected RXR compound in combination with a SERM. INFLAMMATORY DISEASE Ligand is utilizing three innovative approaches to discover drugs for the treatment of inflammation. One approach is being pursued in partnership with Abbott, one approach is being pursued internally and a third approach is being pursued in collaboration with Sankyo. These programs and approaches target diseases such as rheumatoid arthritis, asthma and reperfusion injury. In collaboration with Abbott, Ligand is seeking novel small molecule anti-inflammatory drugs. The collaborative program includes several approaches to discovering modulators of glucocorticoid receptor activity that are better than currently known anti-inflammatory steroids such as hydrocortisone and dexamethasone. Internally, Ligand scientists are pursuing approaches to the discovery of blockers of the actions of 20 22 the inflammation-promoting cytokines, interferon alpha and interferon gamma, through inhibition of their STAT-mediated signal transduction. A number of lead compounds have been identified and are currently being optimized for further drug development. In collaboration with Sankyo, Glycomed scientists are synthesizing and testing compounds that block the adhesion of white blood cells to tissue. Some forms of inflammation are thought to be maintained by continued accumulation of white blood cells at sites of tissue injury. This accumulation is caused by adhesion of the white cells to the endothelial linings of blood vessels in the injured tissue. Research suggests the inflammatory process can be blocked by interfering with white blood cell adhesion, thus reducing tissue localization of the white cells. Inhibiting this process at its early stages by blocking the action of selectins (cell surface proteins mediating adhesion) may provide potent treatments for a variety of acute and chronic inflammatory diseases such as rheumatoid arthritis and asthma. Two lead compound series show improved potency over the natural adhesion Ligand's and a potential third lead series is currently under evaluation. Galardin(TM) (GM6001). MMPIs are also potent inhibitors of a class of enzymes involved in the degradation of proteoglycans and collagen. Galardin, a metalloproteinase inhibitor, is a small, easily-synthesizable molecule that has demonstrated effectiveness at very low concentrations in the prevention of corneal ulceration in animals following alkali injury to the eye. The MMPI Galardin was the first compound for which Glycomed filed an IND. Glycomed received Orphan Drug designation for Galardin in December 1991 and completed enrollment for the Phase II/III clinical trials in July 1994. The study, involving over 500 patients with corneal injury, produced the statistically significant finding that Galardin treatment reduced the number of patients in which perforation of the cornea developed in the period after injury. In contrast, the results of this Phase II/III study of Galardin in corneal injury did not demonstrate a statistically significant impact of Galardin, applied topically in the eye, on the rate of healing of corneal ulcers, the principal intended study endpoint. Perforation is caused by destruction of the full thickness of the cornea. It is one of the most serious complications associated with corneal ulcers and can lead to blindness. Corneal perforation is a significant risk for an estimated 120,000 of the patients with corneal ulcers in the United States each year. Sankyo has Galardin in Phase II trials in Japan and Ligand is seeking a partner to further the development and commercialization of Galardin for ophthalmic use. Composition of matter and use patents (in corneal ulceration) have been issued in the United States. In February 1994, Glycomed signed a License Agreement with Sankyo for all ophthalmic indications in the Far East for Galardin and analogues, while Glycomed retained rights in the rest of the world. STATS The recent discovery of the role of STATs and JAKs explains the mechanism through which many cytokines modulate gene expression and cellular function. The cytokines that produce cellular responses through the JAK/STAT pathway include the interferons, most of the interleukins, the hematopoietic growth factors, growth hormone and leptin. Ligand's JAK/STAT signaling programs are focused on applications for inflammation, infection, transplant rejection, allergy and blood cell deficiencies induced in patients receiving chemotherapy. Ligand's first collaborative effort to utilize the JAK/STAT approach to drug discovery was with Abbott in the field of inflammation. Screening in this program led to the selection of a lead compound for interferon antagonist activity which Ligand is developing internally. Ligand's second collaboration in the JAK/STAT area is with SmithKline Beecham to discover and characterize small molecule, orally bioavailable drugs to enhance the formation and development of blood cells (hematopoiesis). Working together, Ligand and SmithKline Beecham scientists were able to validate a JAK/STAT-based high throughput screen for hematopoietic growth factors, thus achieving the first milestone of the collaboration in under nine months. Based on this and additional collaborative work, the research teams of SmithKline Beecham and Ligand are exploiting recent insights into the roles of JAKs and STATs in mediating hematopoietic growth factor signal transduction and blood cell formation. The Company's goal is to discover orally active compounds that effectively enhance blood cell formation in a variety of anemias and after cancer therapy. Several lead compounds have been identified. In January 1997, SmithKline Beecham 21 23 and Ligand expanded the collaboration to include screens aimed at discovering small molecule mimics of thrombopoietin to stimulate blood platelet production. In March of 1998, Ligand and SmithKline Beecham agreed, subject to regulatory approval, to initiate a new collaboration to develop small molecule drugs that modulate the signaling pathway controlled by leptin as a means of discovering orally available drugs for treatment or prevention of obesity. Ligand's internal STATs research group is focused on the discovery of new leads with potential utility as cancer therapeutics and the development of high throughput screens for agonists and/or antagonists of therapeutically relevant cytokines that use the JAK/STAT pathway. Additional screening efforts have led to the selection of a lead compound for interferon activity in inflammation. Current efforts have allowed the Company to identify the components required for high throughput screening for IL-4 antagonists to treat allergy and asthma and IL-12 antagonists to treat transplant rejections and autoimmine diseases such as rheumatoid arthritis. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses were $72.4 million, $59.5 million and $41.6 million in fiscal 1997, 1996 and 1995, respectively, of which approximately 29%, 38% and 41%, respectively, was sponsored by the Company and the remainder of which was funded pursuant to product development collaboration arrangements. See "Strategic Alliances." IN-LICENSED PRODUCTS PHOTOFRIN. In March 1995, Ligand acquired from QLT PhotoTherapeutics, Inc. ("QLT") exclusive Canadian marketing rights to PHOTOFRIN, porfimer sodium, a laser-activated drug for use in photodynamic therapy for esophageal and superficial bladder cancer. In July 1995, Ligand, through its wholly-owned Canadian subsidiary, Ligand (Canada) Inc. ("Ligand Canada") began distribution of PHOTOFRIN. There are over 3,500 new cases of superficial bladder cancer and 1,200 new cases of esophageal cancer diagnosed each year in Canada. Ligand Canada also has rights to sell the product for any other approved indications in Canada. PHOTOFRIN has been approved in the United States in esophageal cancer, in the Netherlands for lung and esophageal cancers and in Japan for early-stage lung, esophageal, gastric and cervical cancers. In August 1997, QLT filed a supplemental new drug submission with the Canadian Health Protection Branch for PHOTOFRIN in renal cell carcinoma. Proleukin. In September 1994, Ligand entered into an agreement with Cetus Oncology Corporation ("Cetus Oncology"), a subsidiary of Chiron Corporation, to exclusively market in Canada, Proleukin, its recombinant human Interleukin-2 (aldesleukin) for the treatment of kidney cancer. In April 1995, Ligand Canada began distribution of Proleukin. It is also being tested with alpha interferon to determine if additional indications are feasible. There are nearly 5,000 new cases of kidney cancer reported in Canada each year. In August 1997, Chiron Corporation filed a supplemental new drug submission with the Canadian Health Protection Branch for Proleukin in malignant melanoma. The Company has initiated Phase IV trials in Canada with both Proleukin and PHOTOFRIN to further characterize the drugs clinically and facilitate broader acceptance of both products. STRATEGIC ALLIANCES Eli Lilly and Company. In November 1997, the Company and Lilly entered into a strategic alliance for the discovery and development of products based upon Ligand's IR technology. The collaboration focuses on products with broad applications across metabolic diseases, including diabetes, obesity, dislipidemia, insulin resistance and cardiovascular diseases associated with insulin resistance and obesity. Under the alliance Lilly received worldwide, exclusive rights to Targretin and other Ligand compounds and technology associated with the RXR receptor. Lilly received additional rights to use Ligand technology to develop an RXR compound in combination with a SERM in cancer. Ligand retains exclusive rights to independently research, develop and commercialize Targretin and other RXR compounds in the fields of cancer and dermatology. Lilly also 22 24 received worldwide, exclusive rights in certain areas to Ligand's PPAR technology, along with rights to use PPAR research technology with the RXR technology. Lilly and Ligand also intend to begin research programs aimed at discovering novel compounds which therapeutically activate PPAR subtypes for treatment of cardiovascular disease. Finally, Lilly received exclusive rights to Ligand's HNF4 receptor and the obesity gene promoter technology. Ligand has the option to obtain selected rights to one Lilly specialty pharmaceutical product. The product would fit into a current area of strategic focus for Ligand. Should Ligand elect to obtain selected rights to the product, Lilly could receive milestones of up to $20 million in Ligand stock. In the event that Ligand does not exercise this product option, Ligand could sell an additional $20 million in equity to Lilly at a 20% premium to the then market price, and Ligand would qualify for certain additional royalties of up to 1.5% on net sales of Ligand's choice of Targretin, LGD1268 or LGD1324. Ligand will receive double-digit royalties on net sales of the most advanced products and single-digit royalties on net sales of earlier compounds. Ligand will also receive milestones, royalties and options to obtain certain co-development and co-promotion rights for the Lilly-selected RXR compound in combination with a SERM. Lilly has the right to terminate the development of compounds under the agreements, with Ligand receiving rights to certain of such compounds in return for a royalty to Lilly, the rate of which is dependent on the stage at which the development is terminated. In addition, either party may terminate the agreements following a material breach remains uncured for 90 days. Lilly also has the right to terminate the agreement regarding development of Targretin at any time on or before December 15, 1998 if it decides not to proceed with the development of Targretin; Lilly has the right to terminate development of Targretin following December 15, 1998 in certain other instances. In connection with the alliance, Lilly made a $31.2 million equity investment in the Company's Common Stock, provided an upfront non-refundable milestone payment of $12.5 million and could provide the Company with up to $49 million in research funding over five years. As of December 31, 1997, Lilly had funded approximately $1.0 million of the total $49 million in potential research funding under the agreements. SmithKline Beecham Corporation. In February 1995, Ligand entered into a collaborative agreement with SmithKline Beecham providing for a three-year research program (with an option to extend the program for two years at SmithKline Beecham's election) to utilize Ligand's proprietary STATs technology to discover and characterize small molecule, orally bioavailable drugs to control hematopoiesis (the formation and development of blood cells). Under the terms of the agreement, SmithKline Beecham has been granted exclusive worldwide rights for products resulting from the collaboration in certain targeted areas. In exchange, SmithKline Beecham has agreed to provide Ligand up to $9.0 million in research funding and up to $12.5 million in equity investments. This amount includes an initial equity investment of $5.0 million in Common Stock. In November 1995, a second equity investment of $2.5 million in Ligand's Common Stock was provided upon the achievement of certain milestones. In January 1997, a third equity investment of $2.5 million in Ligand's Common Stock was provided upon SmithKline Beecham's election to include screens aimed at discovering small molecule mimics of thrombopoietin. The final installment of $2.5 million was provided in October 1997 as a convertible note as a result of SmithKline Beecham's election to extend the collaboration and provide an additional $3.1 million in research funding. SmithKline Beecham will make additional milestone payments to Ligand as compounds progress in clinical development and will also make royalty payments on product sales. Ligand has the right to select up to three compounds related to hematopoietic targets for development as anti-cancer products other than those compounds selected for development by SmithKline Beecham. SmithKline Beecham has the option to co-promote these products with Ligand in North America and to develop and market them outside North America. SmithKline Beecham can terminate the research program upon 60 days notice in the event of any breach by Ligand or upon six months notice at any time after August 1996. In March of 1998, Ligand and SmithKline Beecham agreed, subject to regulatory approval, to initiate a new collaboration to develop small molecule drugs that modulate the signaling pathway controlled by leptin as a means of discovering orally available drugs for treatment or prevention of obesity. As part of the leptin-obesity collaboration, SmithKline Beecham will purchase 274,423 shares of Ligand Common Stock for $5.0 million ($18.22 per share, a 20% premium over a 15-day trading average of stock prior to execution agreement and will also purchase for $1 million a warrant under certain circumstances after three years. SmithKline Beecham will also purchase additional Ligand Common Stock at 20% premium if a research milestone is achieved. The agreement also provides for cash 23 25 payments if subsequent milestones are met. Under the new agreement, SmithKline Beecham will obtain exclusive worldwide rights to products resulting from the obesity collaboration and has agreed to make milestone payments to Ligand as compounds progress through preclinical and clinical development, and royalty payments on sales, if products result from the research. As of December 31, 1997, SmithKline Beecham had funded approximately $7.7 million of the total of $10.9 million in potential research funding under the agreement. American Home Products Corporation. In September 1994, Ligand entered into a collaborative research agreement with AHP providing for a three-year research program (with an option to extend the program for two years at AHP's election) to discover and develop drugs which interact with estrogen or progesterone receptors for use in hormone replacement therapy, anti-cancer therapy, gynecological diseases, central nervous system disorders associated with menopause and fertility control. AHP has been granted exclusive worldwide rights to all products discovered in the collaboration that are agonists or antagonists to the PRs and ERs for application in the fields of women's health and cancer therapy. Under the agreement, AHP agreed to provide up to $21.5 million in research funding and up to $25.0 million in equity and convertible notes, in addition to milestone and royalty payments to Ligand for such products. An important additional aspect of this collaboration is Ligand's right to assay AHP's extensive chemical library for activity against a selected set of targets of Ligand's internal programs. Ligand may select up to 24 lead compounds for internal development to which Ligand has worldwide rights. AHP made a $5.0 million equity investment in Ligand and provided $10.0 million to Ligand in the form of a convertible note. In the second quarter of 1995, Ligand had achieved certain milestones which qualified the Company to receive the second installment of a $5.0 million convertible note which the Company elected to receive in December 1996. A final convertible note installment of $5.0 million will be provided if AHP exercises its option to extend the period of collaboration from three to five years. In September 1997, the research program was extended for one year. The first two notes issued to AHP are convertible into the Company's Common Stock at $10.01 per share and the final note is convertible at $10.88 per share. The conversion prices are subject to adjustment if certain dilutive events occur to outstanding Common Stock. In August 1996, February 1997, July 1997 and again in December 1997, the Company converted $3.8 million, $3.8 million, $2.5 million and $1.3 million, respectively of the convertible notes outstanding into 374,626, 374,626, 249,749 and 124,875 shares of Common Stock at a $10.01 conversion price. In January 1996, AHP exercised its option to include compounds discovered by Ligand that modulate PRs and to expand the collaboration to encompass the treatment or prevention of osteoporosis through the ER. In connection with the exercise of the option, the Company received $2.5 million in additional research revenue and funding commitments. Ligand's proprietary PR modulators added to the collaboration include three series: LG1447 PR antagonists, LG2527 and LG2716 PR agonists. In May 1996, AHP expanded the collaboration to include four advanced chemical compound series from its internal ER-osteoporosis program. As of December 31, 1997, AHP had funded approximately $16.5 million of the total of $21.5 million in potential research funding under the agreement. Abbott Laboratories. In July 1994, Ligand entered into a collaborative research agreement with Abbott providing for a five-year research program to discover and develop small molecule compounds for the prevention or treatment of inflammatory diseases. Under the agreement, research funding provided by Abbott may total up to approximately $16.0 million. Abbott has also committed significant internal resources to the collaboration. Abbott was granted exclusive worldwide rights for all products discovered in the collaboration for use in inflammation. Ligand was granted exclusive worldwide rights for all anti-cancer products discovered in the collaboration. Abbott will make milestone and royalty payments on products targeted at inflammation resulting from the collaboration, while Ligand will make milestone and royalty payments on products targeted at anti-cancer resulting from the collaboration. Each party will be responsible for the development, registration and commercialization of the products in its respective field. Abbott made an initial $5.0 million equity investment in Ligand and purchased an additional $5.0 million of equity in August 1995. Abbott can terminate the research program at any time upon 90 days notice in the event of any breach by Ligand or upon four months notice at any time. As of December 31, 1997, Abbott had funded approximately $8.0 million of the total of $16.0 million in potential research funding under the agreement. 24 26 Sankyo Company Limited. As part of the Glycomed acquisition, the Company acquired a collaborative research agreement with Sankyo which Glycomed had entered into in June 1994 providing for a three-year research program. Under the agreement, Sankyo reimburses a portion of the Company's research expenses related to the collaboration up to an aggregate of $8.9 million. The agreement also provides that upon being presented with a target compound arising from the research collaboration with the Company, Sankyo will notify the Company whether it wishes to pursue development of the compound. If Sankyo exercises its option to develop the compound, the Company and Sankyo will negotiate in good faith the terms and conditions for an option and license agreement and Sankyo will make additional milestone payments. In connection with the collaborative research agreement, in September 1995, Sankyo purchased $1.5 million of the Company's Common Stock. In June 1997, the research program was extended through October 1997, at which time the research program terminated. Sankyo funded the total potential research funding of $8.9 million, of which $6.5 million was funded since the Merger. Glaxo-Wellcome plc. In September 1992, Ligand entered into a five-year collaborative research agreement with Glaxo to develop drugs for the prevention or treatment of cardiovascular disease. The collaboration significantly enhances Ligand's pharmacological, medicinal chemistry and clinical development resources related to cardiovascular disease. Glaxo has committed significant internal resources to the collaboration and will fund one-half of Ligand's research expenses to support 18 Ligand scientists assigned to the collaboration. Ligand and Glaxo will screen compounds to identify potential lead compounds. Once leads have been identified, Glaxo will have primary responsibility for pharmacology, medicinal chemistry to optimize the drug candidates and preclinical testing. Glaxo also has responsibility for conducting clinical trials of the drug candidates for marketing approval by the FDA and certain other regulatory agencies. Ligand will receive milestone payments as compounds progress through the development cycle and a royalty on any commercialized products. Ligand has retained the right to develop and commercialize products arising from the collaboration in markets not exploited by Glaxo or where Glaxo is not developing a product for the same indication. Glaxo has made a total of $10.0 million in equity investments in Ligand. In connection with the agreement, Glaxo purchased $7.5 million of the Company's Common Stock. Glaxo also purchased $2.5 million of the Company's Common Stock as part of the Company's initial public offering. The collaborative research program was completed in September 1997. Glaxo funded approximately $9.2 million of the total of $10.0 million in potential research funding under the agreement. Allergan, Inc. In June 1992, Ligand and Allergan formed Allergan-Ligand Joint Venture ("the Joint Venture"), owned 50% by each party, to discover, develop and commercialize retinoid drugs. In December 1994, the Company and Allergan formed Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT") to continue the research and development activities previously conducted by the Joint Venture. In June 1995, the Company and ALRT completed a public offering of 3,250,000 units (the "Units") with aggregate proceeds of $32.5 million ("the ALRT Offering") and cash contributions by Allergan and Ligand of $50.0 million and $17.5 million, respectively, providing for net proceeds of $94.3 million for retinoid product research and development. Each Unit consisted of one share of ALRT's Callable Common Stock and two warrants, each warrant entitling the holder to purchase one share of Common Stock of the Company. Immediately prior to the consummation of the ALRT Offering, Allergan Pharmaceuticals (Ireland) Ltd., Inc. ("Allergan Ireland") made a $6.0 million investment in the Company's Common Stock. Since 1992, Allergan Ireland, a wholly owned subsidiary of Allergan, has made $30.0 million in equity investments in Ligand. As part of the ALRT Offering, all rights held by the Joint Venture were licensed to ALRT. The Company, Allergan and ALRT entered into certain other various agreements in connection with the funding of ALRT, including a Technology License Agreement, a Research and Development Agreement, a Commercialization Agreement, and a Services and Administrative Agreements. Ligand's $17.5 million in cash contribution, as well as warrants were in exchange for (i) a right to acquire all of the Callable Common Stock at specified future dates and amounts (the "Stock Purchase Plan") and (ii) a right to acquire all rights to the Panretin (ALRT 1057) product, jointly with Allergan (the "1057 Option"). Allergan's $50.0 million cash contribution to ALRT was in exchange for (i) the right to acquire onehalf of technologies and other assets in the event Ligand exercises its right to acquire all of the Callable Common Stock (the "Asset Purchase Option"), (ii) a similar right to acquire all of the Callable Common Stock if Ligand does not exercise its right and (iii) a right to acquire all rights to Panretin (ALRT 1057) product, jointly with Ligand. 25 27 In September 1997, Ligand and Allergan announced that they had exercised their respective Stock Purchase Option and Asset Purchase Option at the original prices provided by the agreements. Ligand's notice of exercise of the Stock Purchase Option included a stock purchase option exercise price of $21.97 per share of outstanding Callable Common Stock, the original exercise price designated for the exercise of the Stock Purchase Option at any time prior to June 3, 1998. Allergan's notice of exercise of its Asset Purchase Option included the aggregate Asset Purchase Option exercise price of $8.9 million, the original exercise price designated for the exercise of the Asset Purchase Option at any time prior to June 3, 1998. The Asset Purchase Option exercise price was paid in cash to ALRT concurrently with the payment to holders of ALRT Callable Common Stock of the Stock Purchase Option exercise price and was used to pay a portion of such Stock Purchase Option exercise price. Ligand and Allergan also agreed to restructure the terms and conditions relating to research, development, commercialization and sublicense rights for the ALRT compounds in the period following the closing of the exercise of Ligand's Stock Purchase Option and Allergan's Asset Purchase Option. Prior to the restructuring and following the exercise of the Stock Purchase Option and Asset Purchase Option, Ligand and Allergan would have had equal, co-exclusive development, commercialization and sublicense rights in the compounds and assets developed by ALRT. Ligand would have owned all of the outstanding Callable Common Stock of ALRT and Allergan would have acquired (i) a co-exclusive (with ALRT) right to ALRT technology as of the date of the acquisition and (ii) 50% of all tangible assets related to ALRT's activities in the retinoid program. Under the restructured arrangement, however, Ligand received exclusive, worldwide development, commercialization and sublicense rights to Panretin Capsules and Panretin Gel, LGD1550, LGD268 and LGD324. Allergan received exclusive, worldwide development, commercialization and sublicense rights to LGD4310, an RAR antagonist being developed for topical application against mucocutaneous toxicity associated with currently marketed retinoids as well as for psoriasis. Allergan also received LGD326 and LGD4204 (two advanced preclinical RXR selective compounds). In addition, Ligand and Allergan participated in a lottery for each of the approximately 2,000 retinoid compounds existing in the ALRT compound library as of the closing date, with each party acquiring exclusive, worldwide development, commercialization and sublicense rights to the compounds which they select. Ligand and Allergan will each pay the other a royalty based on net sales of products developed from (i) the compounds selected by each in the lottery and (ii) the other ALRT compounds to which each acquires exclusive rights. Ligand will also pay to Allergan a royalty based on Ligand's net sales of Targretin for uses other than oncology and dermatology indications; in the event that Ligand licenses commercialization rights to Targretin to a third party, Ligand will pay to Allergan a percentage of royalties payable to Ligand with respect to sales of Targretin other than in oncology and dermatology indications. Under the restructured arrangement, on the closing of the exercise of the Stock Purchase Option and the Asset Purchase Option, Ligand paid Allergan a non-refundable cash payment in the amount of $4.5 million. ALRT had provided approximately $52.0 million in research funding to Ligand under the Research and Development Agreement. Pfizer Inc. In May 1991, Ligand entered into a five-year collaborative research and development and license agreement with Pfizer to develop better alternative therapies for osteoporosis. Pfizer agreed to provide up to $3.0 million per year in research funding to Ligand in addition to committing significant internal resources. In November 1993, Ligand and Pfizer announced the successful completion of the research phase of their alliance with the identification of a development candidate and backups for the prevention and treatment of osteoporosis. In preclinical studies, the candidates from the program mimic the beneficial effects of estrogen on bone and have an impact on blood serum lipids often associated with cardiac benefits without increasing uterine or breast tissue proliferation. Under the terms of the collaboration, Pfizer has primary responsibility for pharmacology, medicinal chemistry to optimize the drug candidates, preclinical testing, and clinical trials of drug candidates for marketing approval by the FDA and certain other regulatory agencies. Ligand has granted Pfizer exclusive worldwide rights to manufacture and market any compounds jointly developed for osteoporosis. Ligand is to receive up to $7.5 million in milestone payments as development objectives are achieved, in addition to royalties on sales of successful drugs that emerge from the alliance. As 26 28 of December 31, 1993, Pfizer had made a total of $7.5 million of equity investments in Ligand and had funded approximately $9.4 million in research funding. In December 1994, Ligand filed suit against Pfizer in the Superior Court of California in San Diego County for breach of contract and for a declaration of future rights as they relate to droloxifene, a compound upon which Ligand performed work at Pfizer's request during the collaboration between Pfizer and Ligand to develop drugs in the field of osteoporosis. Droloxifene is an estrogen antagonist/partial agonist with potential indications in the treatment of osteoporosis and breast cancer as well as other applications. Ligand and Pfizer entered into a settlement agreement with respect to the lawsuit in April 1996. Under the terms of the settlement agreement, Ligand is entitled to receive milestone payments if Pfizer continues development and royalties if Pfizer commercializes droloxifene. At the option of either party, milestone and royalty payments owed Ligand can be satisfied by Pfizer transferring to Ligand shares of Common Stock at an exchange ratio of $12.375 per share. To date, Ligand has received approximately $1.3 million in milestone payments from Pfizer as a result of the continued development of droloxifene. These milestones were paid in the form of an aggregate of 101,011 shares of Common Stock, which were subsequently retired from treasury stock in September 1996. According to announcements by Pfizer, droloxifene has entered Phase II clinical trials for osteoporosis. The Salk Institute of Biological Studies. In October 1988, Ligand established an exclusive relationship with The Salk Institute which is one of the research centers in the area of IR technology. Dr. Ronald Evans, who cloned and characterized the first IR in 1985 and who invented the co-transfection assay used by Ligand, is a professor in the Gene Expression Laboratory of The Salk Institute and an Investigator of the Howard Hughes Medical Institute. Under the agreement, Ligand has an exclusive, worldwide license to the IR technology developed by Dr. Evans' laboratory at The Salk Institute. Subject to compliance with the terms of the agreement, the term of the license extends for the life of the patents covering such developments. Under the agreement, Ligand made an initial payment to The Salk Institute and issued shares of Common Stock as partial consideration for the license. Ligand is also obligated to make certain royalty payments based on sales of certain products developed using the licensed technology, as well as certain minimum annual royalty payments. Ligand also entered into exclusive consulting agreements with Dr. Evans that continue through July 1998. Under these agreements, Dr. Evans has purchased Common Stock and has been granted options to purchase Common Stock. As a consultant, Dr. Evans meets on a regular basis with Company personnel to review ongoing research and to assist Ligand in defining the technical objectives of future research. Dr. Evans is also involved in identifying new developments made in other leading academic laboratories which relate to Ligand's research interests. Dr. Evans serves as Chairman of Ligand's Scientific Advisory Board. Baylor College of Medicine. In January 1990, Ligand established an exclusive relationship with Baylor, which is a center of IR technology. Dr. Bert W. O'Malley is a professor and the Chairman of the Center for Reproductive Biology at Baylor and leads IR research at that institution. Important features of Ligand's co-transfection assay were developed in Dr. O'Malley's laboratory and are exclusively licensed by Ligand. Ligand has entered into a series of agreements with Baylor under which it has an exclusive, worldwide license to IR technology developed at Baylor and to future improvements made in Dr. O'Malley's laboratory through September 1999. Subject to compliance with the terms of the agreements, the term of the license may extend for the life of the patents covering such developments. Ligand works closely with Dr. O'Malley and Baylor in scientific IR research, particularly in the area of sex steroids and orphan IRs. Under the agreement, Ligand is obligated to make payments to Baylor College of Medicine in support of research done in Dr. O'Malley's laboratory for the period from April 1992 through March 1997. Ligand is also obligated to make certain royalty payments based on the sales of products developed using the licensed technology. Ligand also entered into an exclusive consulting agreement with Dr. O'Malley through September 1997. Discussions are under way to extend such agreement; there can be no assurance such an extension will be negotiated. Dr. O'Malley is a member of Ligand's Scientific Advisory Board. Dr. O'Malley has purchased Common Stock and has been granted options to purchase Common Stock. 27 29 Rockefeller University. In September 1992, Ligand entered into a worldwide, exclusive license agreement with Rockefeller University and exclusive consulting agreements with Dr. James Darnell of Rockefeller University and Dr. David Levy of NYU to develop and commercialize certain technology involving STATs to control gene expression. Dr. Darnell is one of the leading investigators of the control of gene expression by STATs. Rockefeller University will receive (i) payments upon the transfer of the technology to Ligand and upon the first four anniversary dates of the agreement, (ii) a royalty on any commercialized products and (iii) subject to a vesting schedule, shares of Common Stock and warrants to purchase shares of Common Stock. In consideration of related technology assigned by NYU to Rockefeller University and covered by the license agreement with Ligand, NYU received, subject to a vesting schedule, shares of Common Stock and warrants to purchase shares of Common Stock. Subject to a vesting schedule tied to their consulting agreements, Dr. Darnell and Dr. Levy received shares of Common Stock. In addition, in October 1994 Ligand granted Dr. Darnell options to purchase shares of Common Stock. In addition to the collaborations discussed above, the Company also has a number of other consulting, licensing, development and academic agreements by which it strives to advance its technology. PATENTS AND PROPRIETARY RIGHTS Ligand believes that patents and other proprietary rights are important to its business. Ligand's policy is to file patent applications to protect technology, inventions and improvements to its inventions that are considered important to the development of its business. Ligand also relies upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position. To date, Ligand has filed or participated as licensee in the filing of approximately 150 currently pending patent applications in the United States relating to Ligand's technology, as well as foreign counterparts of certain of these applications in many countries. In addition, Ligand is the exclusive licensee to rights covered by approximately 200 patents issued or allowed worldwide to The Salk Institute, Baylor and other licensors. Subject to compliance with the terms of the respective agreements, Ligand's rights under its license with The Salk Institute and other exclusive licensors extend for the life of the patents covering such developments. The patent positions of pharmaceutical and biotechnology firms, including Ligand, are uncertain and involve complex legal and factual questions for which important legal principles are largely unresolved. In addition, the coverage claimed in a patent application can be significantly reduced before or after a patent is issued. The situation is also affected by the fact that the patent law of the United States is changed from time to time. For example, during 1995, the patent term was changed from 17 years from patent grant to 20 years from the filing date of the application for patent. Since a patent has no effect until granted, and because the time during which a patent application spends before the Patent Office cannot be predicted, the actual term of a patent cannot be known until it is granted and that term may be substantially less than the 17 years allowed under former law. Also during 1995, certain advantages of U.S. inventors over foreign inventors were eliminated from the patent law. There are currently pending before the Congress other changes to the patent law which may adversely affect pharmaceutical and biotechnology firms. The extent to which the changes made in 1995 and changes which might occur if pending legislation is adopted would affect the operations of Ligand cannot be ascertained. There can be no assurance that any patent applications will result in the issuance of patents or, if any patents are issued, that they will provide significant proprietary protection or, instead, will be circumvented or invalidated. Since under current law patent applications in the United States are maintained in secrecy until foreign counterparts, if any, publish or patents issue and since publication of discoveries in the scientific or patent literature often lag behind actual discoveries, Ligand cannot be certain that it or any licensor was the first creator of inventions covered by pending patent applications or that it or such licensor was the first to file patent applications for such inventions. Moreover, Ligand might have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention, which could result in substantial cost to Ligand, even if the eventual outcome were favorable to Ligand. There can be no assurance that Ligand's patents or those of its licensors, if issued, would be held valid by a court or that a competitor's technology or product would be found to infringe such patents. 28 30 A number of pharmaceutical and biotechnology companies, and research and academic institutions have developed technologies, filed patent applications or received patents on various technologies that may be related to Ligand's business. Some of these technologies, applications or patents may conflict with Ligand's technologies or patent applications. Such conflict could limit the scope of the patents (if any) that Ligand may be able to obtain or result in the denial of Ligand's patent applications. In addition, if patents that cover Ligand's activities are issued to other companies, there can be no assurance that Ligand would be able to obtain licenses to these patents at a reasonable cost or be able to develop or obtain alternative technology. Ligand also relies upon trade secret protection for its confidential and proprietary information. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to Ligand's trade secrets or disclose such technology or that Ligand can meaningfully protect its trade secrets. It is Ligand's policy to require its employees, consultants, members of the Scientific Advisory Board and parties to collaborative agreements to execute confidentiality agreements upon the commencement of employment or consulting relationships or a collaboration with Ligand. These agreements provide that all confidential information developed or made known during the course of the relationship with Ligand is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions resulting from work performed for Ligand, utilizing property of Ligand or relating to Ligand's business and conceived or completed by the individual during employment shall be the exclusive property of Ligand to the extent permitted by applicable law. There can be no assurance, however, that these agreements will provide meaningful protection of Ligand's trade secrets or adequate remedies in the event of unauthorized use or disclosure of such information. SALES AND MARKETING The creation of infrastructure to commercialize products is a difficult, expensive and time-consuming process. Ligand currently has no sales and only limited marketing capability outside Canada. To market any of its products directly, the Company will need to develop a marketing and sales force with technical expertise and distribution capability or contract with other pharmaceutical and/or health care companies with distributions systems and direct sales forces. There can be no assurance that the Company will be able to establish direct or indirect sales and distribution capabilities or be successful in gaining market acceptance for proprietary products or for other products. To the extent the Company enters into co-promotion or other licensing arrangements, any revenues received by the Company will be dependent on the efforts of third parties, and there can be no assurance that any such efforts will be successful. In September 1994, Ligand was appointed by Cetus Oncology as the sole distributor of Proleukin, an oncology product, within Canada for a five-year period beginning on the date of the first sale of Proleukin by Ligand in Canada. Ligand paid Cetus Oncology $250,000 upon execution of the agreement and made an additional milestone payment of $250,000 to Cetus Oncology upon the receipt of government approval for the sale of Proleukin in Canada. In accordance with the agreement, Ligand initially hired three sales representatives to market Proleukin in Canada. In March 1995, Ligand was also appointed by QLT as the sole distributor within Canada of PHOTOFRIN, a product for the treatment of esophageal and superficial bladder cancer. The agreement covers an initial 10 year period beginning on the date of the first sale of PHOTOFRIN by Ligand in Canada. Ligand paid QLT $180,800 upon execution of the agreement with future payments based on sales volume. MANUFACTURING Ligand currently has no manufacturing facilities, and accordingly relies on third parties, including its collaborative partners, for clinical or commercial production of any compounds under consideration as products. Ligand is currently constructing and validating a current Good Manufacturing Practices ("cGMP") pilot manufacturing capability in order to produce sufficient quantities of products for preclinical testing and initial clinical trials. If Ligand is unable to develop or contract on acceptable terms for manufacturing services, Ligand's ability to conduct preclinical testing and human clinical trials will be adversely affected, resulting in 29 31 the delay of submission of products for regulatory approval and delay of initiation of new development programs, which in turn could materially impair Ligand's competitive position. Although drugs acting through IRs and STATs have been manufactured on a commercial scale by other companies, there can be no assurance that Ligand will be able to manufacture its products on a commercial scale or that such products can be manufactured by Ligand or any other party on behalf of Ligand at costs or in quantities to make commercially viable products. GOVERNMENT REGULATION The manufacturing and marketing of Ligand's products and its ongoing research and development activities are subject to regulation for safety and efficacy by numerous governmental authorities in the United States and other countries. In the United States, pharmaceuticals are subject to rigorous regulation by federal and various state authorities, including FDA. The Federal Food, Drug, and Cosmetic Act and the Public Health Service Act govern the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of Ligand's products. There are often comparable regulations which apply at the state level. Product development and approval within this regulatory framework takes a number of years and involves the expenditure of substantial resources. The steps required before a pharmaceutical agent may be marketed in the United States include (i) preclinical laboratory and animal tests, (ii) the submission to the FDA of an IND, which must become effective before human clinical trials may commence, (iii) adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug, (iv) the submission of an NDA to the FDA and (v) the FDA approval of the NDA prior to any commercial sale or shipment of the drug. A company must pay a one time user fee for NDA submissions, and annually pay user fees for each approved product and manufacturing establishment. In addition to obtaining FDA approval for each product, each domestic drug manufacturing establishment must be registered with the FDA and in California, with the Food and Drug Branch of California. Domestic manufacturing establishments are subject to preapproved inspections by the FDA prior to marketing approval and then to biennial inspections and must comply with cGMP. To supply products for use in the United States, foreign manufacturing establishments must comply with cGMP and are subject to periodic inspection by the FDA or by regulatory authorities in such countries under reciprocal agreements with the FDA. Preclinical tests include laboratory evaluation of product chemistry and animal studies to assess the safety and efficacy of the product and its formulation. The results of the preclinical tests are submitted to the FDA as part of an IND, and unless the FDA objects, the IND will become effective 30 days following its receipt by the FDA. Clinical trials involve the administration of the pharmaceutical product to healthy volunteers or to patients identified as having the condition for which the pharmaceutical is being tested. The pharmaceutical is administered under the supervision of a qualified principal investigator. Clinical trials are conducted in accordance with protocols previously submitted to the FDA as part of the IND that detail the objectives of the study, the parameters used to monitor safety and the efficacy criteria that are being evaluated. Each clinical study is conducted under the auspices of an Institutional Review Board ("IRB") at the institution at which the study is conducted. The IRB considers, among other things, ethical factors, the safety of the human subjects and the possible liability risk for the institution. Clinical trials are typically conducted in three sequential phases that may overlap. In Phase I, the initial introduction of the pharmaceutical into healthy human volunteers, the emphasis is on testing for safety (adverse effects), dosage tolerance, metabolism, distribution, excretion and clinical pharmacology. Phase II involves studies in a limited patient population to determine the efficacy of the pharmaceutical for specific targeted indications, to determine dosage tolerance and optimal dosage and to identify possible adverse side effects and safety risks. Once a compound is found to be effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to evaluate clinical efficacy further and to further test for safety within an expanded patient population at multiple clinical study sites. The FDA reviews both the 30 32 clinical plans and the results of the trials and may discontinue the trials at any time if there are significant safety issues. The results of the preclinical and clinical trials are submitted to the FDA in the form of an NDA for marketing approval. The testing and approval process is likely to require substantial time and effort and there can be no assurance that any approval will be granted on a timely basis, if at all. The approval process is affected by a number of factors, including the severity of the disease, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials. Additional animal studies or clinical trials may be requested during the FDA review process and may delay marketing approval. After FDA approval for the initial indications, further clinical trials would be necessary to gain approval for the use of the product for any additional indications. The FDA may also require post-marketing testing to monitor for adverse effects, which can involve significant expense. The results of preclinical studies and initial clinical trials are not necessarily predictive of results that will be obtained from large-scale clinical trials, and there can be no assurance that clinical trials of any product under development will demonstrate the safety and efficacy of such product or will result in a marketable product. The safety and efficacy of a therapeutic product under development by the Company must be supported by extensive data from clinical trials. A number of companies have suffered significant setbacks in advanced clinical trials, despite promising results in earlier trials. The failure to demonstrate adequately the safety and efficacy of a therapeutic drug under development would delay or prevent regulatory approval of the product and could have a material adverse effect on the Company. In addition, the FDA may require additional clinical trials, which could result in increased costs and significant development delays. The rate of completion of clinical trials of the Company's products is dependent upon, among other factors, obtaining adequate clinical supplies and the rate of patient accrual. Patient accrual is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites and the eligibility criteria for the trial. Delays in planned patient enrollment in clinical trials may result in increased costs, program delays or both, which could have a material adverse effect on the Company. In addition, some of the Company's current corporate partners have certain rights to control the planning and execution of product development and clinical programs, and there can be no assurance that such corporate partners' rights to control aspects of such programs will not impede the Company's ability to conduct such programs in accordance with the schedules and in the manner currently contemplated by the Company for such programs. There can be no assurance that, if clinical trials are completed, the Company will submit an NDA with respect to any potential products or that any such application will be reviewed and approved by the FDA in a timely manner, if at all. For both currently marketed and future products, failure to comply with applicable regulatory requirements after obtaining regulatory approval can, among other things, result in the suspension of regulatory approval, as well as possible civil and criminal sanctions. In addition, changes in existing regulations could have a material adverse effect on Ligand. A drug that receives Orphan Drug designation by the FDA and is the first product to receive FDA marketing approval for its product claim is currently entitled to a seven-year exclusive marketing period in the United States for that product claim. A drug that is considered by the FDA to be different than a particular Orphan Drug, however, is not barred from sale in the United States during such seven-year exclusive marketing period. The FDA approved an application by Ligand to have Panretin Capsules designated an "Orphan Drug" for the treatment of APL. Ligand is preparing additional applications for Orphan Drug designations in other indications. Congress is currently considering significant changes to the Orphan Drug Act, including a reduction in the exclusive marketing period from seven years to four years, with the possibility of a three-year extension for certain drugs. For marketing outside the United States before FDA approval to market, the Company must submit an export permit application to the FDA. The Company also will be subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs. The requirements relating to the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country and there can be no assurance that the Company or any of its partners will meet and sustain any such requirements. 31 33 COMPETITION Some of the drugs which Ligand is developing will compete with existing therapies. In addition, a number of companies are pursuing the development of novel pharmaceuticals which target the same diseases that Ligand is targeting. A number of pharmaceutical and biotechnology companies are pursuing IR-related or STAT-related approaches to drug discovery and development. Furthermore, academic institutions, government agencies, and other public and private organizations conducting research may seek patent protection with respect to potentially competing products or technologies and may establish collaborative arrangements with competitors of Ligand. Many of Ligand's existing or potential competitors, particularly large pharmaceutical companies, have substantially greater financial, technical and human resources than Ligand and may be better equipped to develop, manufacture and market products. In addition, many of these companies have extensive experience in preclinical testing and human clinical trials. These companies may develop and introduce products and processes competitive with or superior to those of Ligand. The development by others of new treatment methods for those indications for which Ligand is developing pharmaceuticals could render these pharmaceuticals noncompetitive or obsolete. Ligand's products under development are expected to address a broad range of markets. Ligand's competition will be determined in part by the potential indications for which Ligand's products are developed and ultimately approved by regulatory authorities. For certain of Ligand's potential products, an important factor in competition may be the timing of market introduction of Ligand's or competitors' products. Accordingly, the relative speed at which Ligand or its existing or its future corporate partners can develop products, complete the clinical trials and regulatory approval processes, and supply commercial quantities of the products to the market are expected to be important competitive factors. Ligand expects that competition among products approved for sale will be based, among other things, on product efficacy, safety, reliability, availability, price and patent position. Ligand's competitive position also depends upon its ability to attract and retain qualified personnel, obtain patent protection or otherwise develop proprietary products or processes and secure sufficient capital resources for the often substantial period between technological conception and commercial sales. PRODUCT LIABILITY AND INSURANCE Ligand's business exposes it to potential product liability risks which are inherent in the testing, manufacturing and marketing of human therapeutic products. Ligand currently has limited product liability insurance; however, there can be no assurance that Ligand will be able to maintain such insurance on acceptable terms or that such insurance will provide adequate coverage against potential liabilities. The Company expects to procure additional insurance when its products progress to a later stage of development and if any rights to later-stage products are in-licensed in the future. To the extent that product liability insurance, if available, does not cover potential claims, the Company will be required to self-insure the risks associated with such claims. A successful product liability claim or series of claims brought against the Company could have a material adverse effect on the Company. HUMAN RESOURCES As of December 31, 1997, Ligand had 345 full-time employees, of whom 266 were involved directly in scientific research and development activities. Of these employees, approximately 76 hold Ph.D. or M.D. degrees. RISKS AND UNCERTAINTIES In addition to the other business information contained herein, the following are among the factors that should also be considered carefully in evaluating Ligand, its wholly-owned subsidiaries, Glycomed Inc., Ligand (Canada) Inc. and Allergan Ligand Retinoid Therapeutics, Inc. and its business. 32 34 Early Stage of Product Development; Technological Uncertainty. Ligand was founded in 1987 and has not generated any revenues from the sale of products developed by Ligand or its collaborative partners. To achieve profitable operations, the Company, alone or with others, must successfully develop, clinically test, market and sell its products. Any products resulting from the Company's or its collaborative partners' product development efforts are not expected to be available for sale for at least several years, if at all. The development of new pharmaceutical products is highly uncertain and subject to a number of significant risks. Potential products that appear to be promising at early stages of development may not reach the market for a number of reasons. Such reasons include the possibilities that potential products are found during preclinical testing or clinical trials to be ineffective or to cause harmful side effects, that they fail to receive necessary regulatory approvals, are difficult or uneconomical to manufacture on a large scale, fail to achieve market acceptance or are precluded from commercialization by proprietary rights of third parties. To date, Ligand's resources have been substantially dedicated to the research and development of potential pharmaceutical products based upon its expertise in IR and STATs technologies. Even though certain pharmaceutical products act through IRs, some aspects of the Company's IR technologies have not been used to produce marketed products. In addition, the Company is not aware of any drugs that have been developed and successfully commercialized that interact directly with STATs. Much remains to be learned about the location and function of IRs and STATs. Most of the Company's potential products will require extensive additional development, including preclinical testing and clinical trials, as well as regulatory approvals, prior to commercialization. No assurance can be given that the Company's product development efforts will be successful, that required regulatory approvals from the FDA or equivalent foreign authorities for any indication will be obtained or that any products, if introduced, will be capable of being produced in commercial quantities at reasonable costs or will be successfully marketed. Further, the Company has no sales and only limited marketing capabilities outside Canada, and even if the Company's products in internal development are approved for marketing, there can be no assurance that the Company will be able to develop such capabilities or successfully market such products. History of Operating Losses; Accumulated Deficit; Future Capital Needs; Uncertainty of Additional Funding. Ligand has experienced significant operating losses since its inception in 1987. As of December 31, 1997, Ligand had an accumulated deficit of approximately $278 million. To date, substantially all of Ligand's revenues have consisted of amounts received under collaborative arrangements. The Company expects to incur additional losses at least over the next several years and expects losses to increase as the Company's research and development efforts and clinical trials progress. The discovery and development of products will require the commitment of substantial resources to conduct research, preclinical testing and clinical trials, to establish pilot scale and commercial scale manufacturing processes and facilities, and to establish and develop quality control, regulatory, marketing, sales and administrative capabilities. The future capital requirements of the Company will depend on many factors, including the pace of scientific progress in its research and development programs, the magnitude of these programs, the scope and results of preclinical testing and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims, competing technological and market developments, the ability to establish additional collaborations, changes in existing collaborations, the cost of manufacturing scale-up and the effectiveness of the Company's commercialization activities. To date, Ligand has not generated any revenue from the sales of products developed by Ligand or its collaborative partners. There can be no assurance that Ligand independently or through its collaborations will successfully develop, manufacture or market any products or ever achieve or sustain revenues or profitability from the commercialization of such products. Moreover, even if profitability is achieved, the level of that profitability cannot be accurately predicted. Ligand expects that operating results will fluctuate from quarter to quarter as a result of differences in the timing of expenses incurred and the revenues received from collaborative arrangements and other sources. Some of these fluctuations may be significant. The Company believes that its available cash, cash equivalents, marketable securities and existing sources of funding will be adequate to satisfy its anticipated capital requirements through 1999. 33 35 Glycomed's outstanding indebtedness includes $50 million principal amount of 7 1/2% Convertible Subordinated Debentures Due 2003 (the "Debentures"). There can be no assurance that Glycomed will have the funds necessary to pay the interest on and the principal of the Debentures or, if not, that it will be able to refinance the Debentures. The Company expects that it will seek any additional capital needed to fund its operations through new collaborations, the extension of existing collaborations, or through public or private equity or debt financings. There can be no assurance that additional financing will be available on acceptable terms, if at all. Any inability of the Company to obtain additional financing or of Glycomed to service its obligations under the Debentures could have a material adverse effect on the Company. Uncertainties Related to Clinical Trials. Before obtaining required regulatory approvals for the commercial sale of each product under development, the Company and its collaborators must demonstrate through preclinical studies and clinical trials that such product is safe and efficacious for use. The results of preclinical studies and initial clinical trials are not necessarily predictive of results that will be obtained from large-scale clinical trials, and there can be no assurance that clinical trials of any product under development will demonstrate the safety and efficacy of such product or will result in a marketable product. The safety and efficacy of a therapeutic product under development by the Company must be supported by extensive data from clinical trials. A number of companies have suffered significant setbacks in advanced clinical trials, despite promising results in earlier trials. The failure to demonstrate adequately the safety and efficacy of a therapeutic drug under development would delay or prevent regulatory approval of the product and could have a material adverse effect on the Company. In addition, the FDA may require additional clinical trials, which could result in increased costs and significant development delays. The rate of completion of clinical trials of the Company's potential products is dependent upon, among other factors, obtaining adequate clinical supplies and the rate of patient accrual. Patient accrual is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites and the eligibility criteria for the trial. Delays in planned patient enrollment in clinical trials may result in increased costs, program delays or both, which could have a material adverse effect on the Company. In addition, some of the Company's current collaborative partners have certain rights to control the planning and execution of product development and clinical programs, and there can be no assurance that such corporate partners' rights to control aspects of such programs will not impede the Company's ability to conduct such programs in accordance with the schedules and in the manner currently contemplated by the Company for such programs. There can be no assurance that, if clinical trials are completed, the Company or its collaborative partners will submit an NDA with respect to any potential products or that any such application will be reviewed and approved by the FDA in a timely manner, if at all. Reliance on Collaborative Relationships. The Company's strategy for the development, clinical testing, manufacturing and commercialization of certain of its potential products includes entering into collaborations with corporate partners, licensors, licensees and others. To date, Ligand has entered into drug discovery and development collaborations with Lilly, SmithKline Beecham, AHP, Abbott, Sankyo, Glaxo, Allergan and Pfizer. These collaborations provide Ligand with funding and research and development resources for potential products for the treatment or control of metabolic diseases, hematopoiesis, women's health disorders, inflammation, cardiovascular disease, cancer and skin disease, and osteoporosis, respectively. The Company's collaborative agreements allow its collaborative partners significant discretion in electing to pursue or not to pursue any development program. There can be no assurance that the Company's collaborations will continue or that the collaborations will be successful. In addition, there can be no assurance that Ligand's collaborators will not pursue alternative technologies either on their own or in collaboration with others as a means of developing drugs competitive with the types of drugs currently being developed in collaboration with Ligand, and any such action may result in the withdrawal of support and increased competition for the Company's programs. In addition, if products are approved for marketing under these programs, any revenues to Ligand from these products will be dependent on the manufacturing, marketing and sales efforts of its collaborators, which generally retain commercialization rights under the collaborative agreements. Ligand's current collaborators also generally have the right to terminate their respective collaborations under certain circumstances. If any of the Company's collaborative partners were to breach or terminate its agreements with the 34 36 Company or otherwise fail to conduct its collaborative activities successfully, the development of the Company's products under such agreements would be delayed or terminated. The delay or termination of any of the collaborations could have a material adverse effect on Ligand. There can be no assurance that disputes will not arise in the future with Ligand's collaborators, including with respect to the ownership of rights to any technology developed. For example, the Company was involved in litigation with Pfizer, which was settled in April 1996, with respect to Ligand's rights to receive milestones and royalties based on the development and commercialization of droloxifene. These and other possible disagreements between collaborators and the Company could lead to delays in the achievement of milestones or receipt of milestone payments or research revenue, to delays or interruptions in, or termination of, collaborative research, development and commercialization of certain potential products, or could require or result in litigation or arbitration, which could be time consuming and expensive and could have a material adverse effect on the Company. Uncertainty of Patent Protection; Dependence on Proprietary Technology. The patent positions of pharmaceutical and biopharmaceutical firms, including Ligand, are uncertain and involve complex legal and technical questions for which important legal principles are largely unresolved. In addition, the coverage sought in a patent application can be significantly reduced before or after a patent is issued. This uncertain situation is also affected by revisions to the United States patent law adopted in recent years to give effect to international accords to which the United States has become a party. The extent to which such changes in law will affect the operations of Ligand cannot be ascertained. In addition, there is currently pending before Congress legislation providing for other changes to the patent law which may adversely affect pharmaceutical and biopharmaceutical firms. If such pending legislation is adopted, the extent to which such changes would affect the operations of the Company cannot be ascertained. Ligand's success will depend in part on its ability to obtain patent protection for its technology both in the United States and other countries. A number of pharmaceutical and biotechnology companies and research and academic institutions have developed technologies, filed patent applications or received patents on various technologies that may be related to Ligand's business. Some of these patent applications, patents or technologies may conflict with Ligand's technologies or patent applications. Any such conflict could limit the scope of the patents, if any, that Ligand may be able to obtain or result in the denial of Ligand's patent applications. In addition, if patents that cover Ligand's activities are issued to other companies, there can be no assurance that Ligand would be able to obtain licenses to such patents at a reasonable cost, if at all, or be able to develop or obtain alternative technology. The Company has from time to time had, continues to have and may have in the future discussions with its current and potential collaborators regarding the scope and validity of the Company's patent and other proprietary rights to its technologies, including the Company's cotransfection assay. If a collaborator or other party were successful in having substantial patent rights of the Company determined to be invalid, it could adversely affect the ability of the Company to retain existing collaborations beyond their expiration or, where contractually permitted, encourage their termination. Such a determination could also adversely affect the Company's ability to enter into new collaborations. If any disputes should arise in the future with respect to the rights in any technology developed with a collaborator or with respect to other matters involving the collaboration, there could be delays in the achievement of milestones or receipt of milestone payments or research revenues, or interruptions or termination of collaborative research, development and commercialization of certain potential products, and litigation or arbitration could result. Any of the foregoing matters could be time consuming and expensive and could have a material adverse effect on the Company. Ligand owns or has exclusively licensed over 150 currently pending patent applications in the United States relating to Ligand's technology, as well as foreign counterparts of certain of these applications in many countries. There can be no assurance that patents will issue from any of these applications or, if patents do issue, that claims allowed will be sufficient to protect Ligand's technology. In addition, Ligand is the owner or exclusive licensee of rights covered by approximately 200 worldwide patents issued or allowed to it or to The Salk Institute, Baylor and other licensors. Further, there can be no assurance that any patents issued to Ligand or to licensors of Ligand's technology will not be challenged, invalidated, circumvented or rendered unenforceable based on, among other things, subsequently discovered prior art, lack of entitlement to the 35 37 priority of an earlier, related application, or failure to comply with the written description, best mode, enablement or other applicable requirements, or that the rights granted under any such patents will provide significant proprietary protection or commercial advantage to Ligand. The invalidation, circumvention or unenforceability of any of Ligand's patent protection could have a material adverse effect on the Company. The commercial success of Ligand will also depend in part on Ligand's not infringing patents issued to competitors and not breaching technology licenses that cover technology used in Ligand's products. It is uncertain whether any thirdparty patents will require Ligand to develop alternative technology or to alter its products or processes, obtain licenses or cease certain activities. If any such licenses are required, there can be no assurance that Ligand will be able to obtain such licenses on commercially favorable terms, if at all. Failure by Ligand to obtain a license to any technology that it may require to commercialize its products could have a material adverse effect on Ligand. Litigation, which could result in substantial cost to Ligand, may also be necessary to enforce any patents issued or licensed to Ligand or to determine the scope and validity of third-party proprietary rights. There can be no assurance that Ligand's patents or those of its licensors, if issued, would be held valid by a court or that a competitor's technology or product would be found to infringe such patents. If any of its competitors have filed patent applications in the United States which claim technology also invented by Ligand, Ligand may be required to participate in interference proceedings declared by the U.S. Patent and Trademark Office ("PTO") in order to determine priority of invention and, thus, the right to a patent for the technology, which could result in substantial cost to Ligand to determine its rights. Ligand has learned that a United States patent has been issued to, and foreign counterparts have been filed by, Hoffman LaRoche ("Roche") that include claims to a formulation of 9-cis-Retinoic acid (Panretin) and use of that compound to treat epithelial cancers. Ligand had previously filed an application which has an earlier filing date than the Roche patent and which has claims that the Company believes are broader than but overlap in part with claims under the Roche patent. Ligand's rights under its patent application have been exclusively licensed to ALRT. Ligand acquired the exclusive right to develop and commercialize Panretin Capsules and Gel. Ligand is currently investigating the scope and validity of this patent to determine its impact upon the Panretin Capsules and Gel products. The PTO has informed Ligand that the overlapping claims are patentable to Ligand and initiated an interference proceeding to determine whether Ligand or Roche is entitled to a patent by having been first to invent the common subject matter. The Company cannot be assured of a favorable outcome in the interference proceeding because of factors not known at this time upon which the outcome may depend. In addition, the interference proceeding may delay the decision of the PTO regarding the Company's application with claims covering the Panretin Capsules and Gel products. While the Company believes that the Roche patent does not cover the use of Panretin Capsules and Gel to treat leukemias such as APL and sarcomas such as KS, or the treatment of skin diseases such as psoriasis, if the Company and ALRT do not prevail in the interference proceeding, the Roche patent might block the Company's use of Panretin Capsules and Gel in certain cancers, and the Company may not be able to obtain patent protection for the Panretin Capsules and Gel products. Ligand also relies upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position. There can be no assurance that others will not independently develop substantially equivalent proprietary information or otherwise gain access to or disclose such information regarding Ligand. It is Ligand's policy to require its employees, certain contractors, consultants, members of its Scientific Advisory Board and parties to collaborative agreements to execute confidentiality agreements upon the commencement of employment or consulting relationships or a collaboration with Ligand. There can be no assurance that these agreements will not be breached, that they will provide meaningful protection of Ligand's trade secrets or adequate remedies in the event of unauthorized use or disclosure of such information or that Ligand's trade secrets will not otherwise become known or be independently discovered by its competitors. Lack of Manufacturing Capability; Reliance on Third-Party Manufacturers. Ligand currently has no manufacturing facilities and, accordingly, relies on third parties, including its collaborative partners, for clinical or commercial production of any compounds under consideration as products. Ligand is currently constructing and validating a cGMP pilot manufacturing capability in order to produce sufficient quantities of products for preclinical testing and initial clinical trials. If Ligand is unable to develop or contract on 36 38 acceptable terms for manufacturing services, Ligand's ability to conduct preclinical testing and human clinical trials will be adversely affected, resulting in the delay of submission of products for regulatory approval and delay of initiation of new development programs, which in turn could materially impair Ligand's competitive position. Although drugs acting through IRs and STATs have been manufactured on a commercial scale by other companies, there can be no assurance that Ligand will be able to manufacture its products on a commercial scale or that such products can be manufactured by Ligand or any other party on behalf of Ligand at costs or in quantities to make commercially viable products. Limited Sales and Marketing Capability. The creation of infrastructure to commercialize pharmaceutical products is a difficult, expensive and time-consuming process. Ligand currently has no sales and only limited marketing capability outside Canada. In Canada, Ligand has been appointed as the sole distributor of two oncology products, Proleukin, which was developed by Cetus Oncology Corporation and PHOTOFRIN, which was developed by QLT PhotoTherapeutics, Inc. To market any of its products directly, the Company will need to develop a marketing and sales force with technical expertise and distribution capability or contract with other pharmaceutical and/or health care companies with distribution systems and direct sales forces. There can be no assurance that the Company will be able to establish direct or indirect sales and distribution capabilities or be successful in gaining market acceptance for proprietary products or for other products. To the extent the Company enters into co-promotion or other licensing arrangements, any revenues received by the Company will be dependent on the efforts of third parties, and there can be no assurance that any such efforts will be successful. Substantial Competition; Risk of Technological Obsolescence. Some of the drugs which Ligand is developing will compete with existing therapies. In addition, a number of companies are pursuing the development of novel pharmaceuticals which target the same diseases that Ligand is targeting as well as IR-related, STAT-related and complex carbohydrate-related approaches to drug discovery and development. Many of Ligand's existing or potential competitors, particularly large pharmaceutical companies, have substantially greater financial, technical and human resources than Ligand and may be better equipped to develop, manufacture and market products. In addition, many of these companies have extensive experience in preclinical testing and human clinical trials, obtaining FDA and other regulatory approvals and manufacturing and marketing pharmaceutical products. Academic institutions, governmental agencies and other public and private research organizations are conducting research to develop technologies and products that may compete with those under development by the Company. These institutions are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for the use of technology that they have developed. These institutions also may market competitive commercial products on their own or through joint ventures and will compete with the Company in recruiting highly qualified scientific personnel. Any of these companies, academic institutions, government agencies or research organizations may develop and introduce products and processes competitive with or superior to those of Ligand. The development by others of new treatment methods for those indications for which Ligand is developing products could render Ligand's products noncompetitive or obsolete. Ligand's products under development target a broad range of markets. Ligand's competition will be determined in part by the potential indications for which Ligand's products are developed and ultimately approved by regulatory authorities. For certain of Ligand's potential products, an important factor in competition may be the timing of market introduction of Ligand's or competitors' products. Accordingly, the relative speed at which Ligand or its existing or future corporate partners can develop products, complete the clinical trials and regulatory approval processes, and supply commercial quantities of the products to the market is expected to be an important competitive factor. Ligand expects that competition among products approved for sale will be based, among other things, on product efficacy, safety, reliability, availability, price and patent position. Ligand's competitive position also depends upon its ability to attract and retain qualified personnel, obtain patent protection or otherwise develop proprietary products or processes, and secure sufficient capital resources. 37 39 Extensive Government Regulation; No Assurance of Regulatory Approval. The manufacturing and marketing of Ligand's products and its ongoing research and development activities are subject to and regulation for safety and efficacy by numerous governmental authorities in the United States and other countries. Prior to marketing, any drug developed by the Company must undergo rigorous preclinical and clinical testing and an extensive regulatory approval process mandated by the FDA and equivalent foreign authorities. These processes can take a number of years and require the expenditure of substantial resources. The time required for completing such testing and obtaining such approvals is uncertain, and there is no assurance that any such approval will be obtained. The Company or its collaborative partners may decide to replace a compound in testing with a modified or optimized compound, thus extending the test period. In addition, delays or rejections may be encountered based upon changes in FDA policy during the period of product development and FDA review of each submitted new drug application or product license application. Similar delays may also be encountered in other countries. There can be no assurance that even after such time and expenditures, regulatory approval will be obtained for any products developed by the Company. Moreover, prior to receiving FDA or equivalent foreign authority approval to market its products, the Company may be required to demonstrate that its products represent improved forms of treatment over existing therapies. If regulatory approval of a product is granted, such approval may entail limitations on the indicated uses for which the product may be marketed. Further, even if such regulatory approval is obtained, a marketed product, its manufacturer and its manufacturing facilities are subject to continual review and periodic inspections, and subsequent discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on such product or manufacturer, including withdrawal of the product from the market. Dependence on Third-Party Reimbursement and Health Care Reform. Ligand's commercial success will be heavily dependent upon the availability of reimbursement for the use of any products developed by the Company or its collaborative partners. There can be no assurance that Medicare and third-party payors will authorize or otherwise budget reimbursement for the prescription of any of Ligand's potential products. Additionally, third-party payors, including Medicare, are increasingly challenging the prices charged for medical products and services and may require additional cost-benefit analysis data from the Company in order to demonstrate the cost-effectiveness of its products. There can be no assurance that the Company will be able to provide such data in order to gain market acceptance of its products with respect to pricing and reimbursement. In the United States, the Company expects that there will continue to be a number of federal and state proposals to implement government control of pricing and profitability of prescription pharmaceuticals. In addition, increasing emphasis on managed health care will continue to put pressure on such pricing. Cost control initiatives could decrease the price that the Company or any of its collaborative partners or other licensees receives for any drugs it or they may discover or develop in the future and, by preventing the recovery of development costs, which could be substantial, and an appropriate profit margin, could have a material adverse effect on the Company. Further, to the extent that cost control initiatives have a material adverse effect on the Company's collaborative partners, the Company's ability to commercialize its products and to realize royalties may be adversely affected. Furthermore, federal and state regulations govern or influence the reimbursement to health care providers of fees and capital equipment costs in connection with medical treatment of certain patients. If any actions are taken by federal and/or state governments, such actions could adversely affect the prospects for sales of the Company's products. There can be no assurance that action taken by federal and/or state governments, if any, with regard to health care reform will not have a material adverse effect on the Company. Product Liability and Insurance Risks. Ligand's business exposes it to potential product liability risks which are inherent in the testing, manufacturing and marketing of human therapeutic products. Certain of the compounds the Company is investigating could be injurious to humans. For example, retinoids as a class are known to contain compounds which can cause birth defects. Ligand currently has limited product liability insurance; however, there can be no assurance that Ligand will be able to maintain such insurance on acceptable terms or that such insurance will provide adequate coverage against potential liabilities. The Company expects to procure additional insurance when its products progress to a later stage of development 38 40 and if any rights to later-stage products are in-licensed in the future. To the extent that product liability insurance, if available, does not cover potential claims, the Company will be required to self-insure the risks associated with such claims. A successful product liability claim or series of claims brought against the Company could have a material adverse effect on the Company. Dependence on Key Employees. Ligand is highly dependent on the principal members of its scientific and management staff, the loss of whose services might impede the achievement of development objectives. Furthermore, Ligand is currently experiencing a period of rapid growth which requires the hiring of significant numbers of scientific, management and operational personnel. Accordingly, recruiting and retaining qualified management, operations and scientific personnel to perform research and development work in the future will also be critical to Ligand's success. Although Ligand believes it will be successful in attracting and retaining skilled and experienced management, operational and scientific personnel, there can be no assurance that Ligand will be able to attract and retain such personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies, universities and other research institutions for such personnel. Use of Hazardous Materials. Ligand's research and development involves the controlled use of hazardous materials, chemicals and various radioactive compounds. For example, retinoids as a class are known to contain compounds which can cause birth defects. Although the Company believes that its current safety procedures for handling and disposing of such materials, chemicals and compounds, comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of any accident, the Company could be held liable for any damages that result and any such liability could be significant. The Company may incur substantial costs to comply with environmental regulations. Any such event could have a material adverse effect on the Company. Volatility of Stock Price. The market prices and trading volumes for securities of emerging companies, like Ligand, have historically been highly volatile and have experienced significant fluctuations unrelated to the operating performance of such companies. Future announcements concerning the Company or its competitors may have a significant impact on the market price of the Common Stock. Such announcements might include the results of research, development testing, technological innovations, new commercial products, government regulation, developments concerning proprietary rights, litigation or public concern as to the safety of the products. Absence of Cash Dividends. No cash dividends have been paid on the Company's Common Stock to date, and Ligand does not anticipate paying cash dividends in the foreseeable future. Effect of Shareholder Rights Plan and Certain Anti-Takeover Provisions. In September 1996, the Company's Board of Directors adopted a preferred shares rights plan (the "Shareholder Rights Plan") which provides for a dividend distribution of one preferred share purchase right (a "Right") on each outstanding share of the Company's Common Stock. Each Right entitles stockholders to buy 1/1000th of a share of Ligand Series A Participating Preferred Stock at an exercise price of $100, subject to adjustment. The Rights will become exercisable following the tenth day after a person or group announces acquisition of 20% or more of the Company's Common Stock, or announces commencement of a tender offer, the consummation of which would result in ownership by the person or group of 20% or more of the Company's Common Stock. The Company will be entitled to redeem the Rights at $0.01 per Right at any time on or before the earlier of the tenth day following acquisition by a person or group of 20% or more of the Company's Common Stock and September 13, 2006. Ligand's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") includes a provision that requires the approval of the holders of 66 2/3% of Ligand's voting stock as a condition to a merger or certain other business transactions with, or proposed by, a holder of 15% or more of Ligand's voting stock, except in cases where certain directors approve the transaction or certain minimum price criteria and other procedural requirements are met (the "Fair Price Provision"). The Certificate of Incorporation also requires that any action required or permitted to be taken by stockholders of Ligand must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent 39 41 in writing. In addition, special meetings of the stockholders of Ligand may be called only by the Board of Directors, the Chairman of the Board or the President of Ligand or by any person or persons holding shares representing at least 10% of the outstanding Common Stock of the Company. The Shareholder Rights Plan, the Fair Price Provision and other charter provisions may discourage certain types of transactions involving an actual or potential change in control of Ligand, including transactions in which the stockholders might otherwise receive a premium for their shares over then current market prices, and may limit the ability of the stockholders to approve transactions that they may deem to be in their best interests. In addition, the Board of Directors has the authority to fix the rights and preferences of and issue shares of preferred stock, which may have the effect of delaying or preventing a change in control of Ligand without action by the stockholders. 40 42 ITEM 2. PROPERTIES Ligand currently leases and occupies three facilities in San Diego, California. In July 1994, the Company entered into a 20-year lease related to the construction of a new build-to-suit laboratory facility. This 52,800 square foot facility was completed and occupied in August 1995. In March 1997, the Company entered into a long term lease for laboratory and administrative office space related to a second build-to-suit facility. This 82,000 square foot facility was completed and occupied in December 1997. The third facility in San Diego is occupied under a lease of approximately 7,500 square feet of laboratory space which continues through February 1999. The Company believes these facilities will be adequate to meet the Company's near-term space requirements. ITEM 3. LEGAL PROCEEDINGS From time to time the Company is a party to other litigation arising in the normal course of business. As of the date of the filing, the Company is not a party to any litigation which would have a material effect on its financial position or business operations taken as a whole. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders in the fourth quarter ended December 31, 1997. 41 43 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS (A) MARKET INFORMATION The Company's Common Stock trades on the Nasdaq National Market tier of the Nasdaq Stock Market under the symbol "LGND." The following table sets forth the high and low sales prices for the Company's Common Stock on the Nasdaq National Market for the periods indicated.
PRICE RANGE --------------- HIGH LOW ---- --- YEAR ENDED DECEMBER 31, 1996: Quarter.............................................. 1st $13 3/4 $ 9 3/4 Quarter.............................................. 2nd 19 3/4 11 1/8 Quarter.............................................. 3rd 16 1/8 10 3/8 Quarter.............................................. 4th 15 11/16 11 1/4 YEAR ENDING DECEMBER 31, 1997: Quarter.............................................. 1st $17 $10 1/4 Quarter.............................................. 2nd 14 1/2 9 1/8 Quarter.............................................. 3rd 17 3/4 11 5/8 Quarter.............................................. 4th 18 3/8 11 1/4
(B) HOLDERS As of February 28, 1998, there were approximately 1,539 holders of record of the Common Stock. (C) DIVIDENDS The Company has never declared or paid any cash dividends on its capital stock and does not intend to pay any cash dividends in the foreseeable future. The Company currently intends to retain its earnings, if any, to finance future growth. (D) RECENT SALES OF UNREGISTERED SECURITIES In November 1997, the Company issued to Eli Lilly and Company 2,176,279 shares of the Company's Common Stock at $17.23 per share for a total purchase price of $37.5 million in cash under an exemption from registration pursuant to Section 4(2) of Securities Act of 1933, as amended (the "Securities Act"). In December 1997, Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products converted $1.3 million of convertible notes outstanding into 124,875 shares of the Company's Common Stock, at a predetermined conversion rate of $10.01 in a transaction exempt from registration of Section 4(2) of the Securities Act. 42 44 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected financial data set forth below with respect to the Company's consolidated financial statements has been derived from the audited financial statements. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and related notes included elsewhere in this filing.
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT NET LOSS PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERA- TIONS DATA: Revenues: Collaborative research and development Related parties.......... $ 18,997 $ 18,641 $ 11,972 $ 8,342 $ 9,974 Unrelated parties........ 32,284 17,994 12,424 4,893 6,138 Other...................... 418 207 120 74 150 ----------- ----------- ----------- ----------- ----------- Total revenues........ 51,699 36,842 24,516 13,309 16,262 ----------- ----------- ----------- ----------- ----------- Costs and expenses: Research and development... 72,426 59,494 41,636 27,205 24,301 Selling, general and administrative........... 10,108 10,205 8,181 6,957 6,192 Write-off of acquired in-process technology.... 64,970 -- 19,564 -- -- ALRT contribution.......... -- -- 17,500 -- -- ----------- ----------- ----------- ----------- ----------- Total operating expenses............ 147,504 69,699 86,881 34,162 30,493 ----------- ----------- ----------- ----------- ----------- Loss from operations............ (95,805) (32,857) (62,365) (20,853) (14,231) Interest income................. 3,743 3,704 3,603 1,298 2,005 Interest expense................ (8,088) (8,160) (5,410) (679) (353) Equity in operations of Joint Venture....................... -- -- -- (6,845) (6,879) ----------- ----------- ----------- ----------- ----------- Net loss........................ $ (100,150) $ (37,313) $ (64,172) $ (27,079) $ (19,458) =========== =========== =========== =========== =========== Basic and diluted net loss per share......................... $ (3.02) $ (1.30) $ (2.70) $ (1.57) $ (1.19) =========== =========== =========== =========== =========== Shares used in computing net loss per share................ 33,128,372 28,780,914 23,791,542 17,240,535 16,356,656 =========== =========== =========== =========== ===========
AT DECEMBER 31, ------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- -------- -------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents, short term investments and restricted cash........ $ 86,287 $ 84,179 $ 76,903 $ 38,403 $ 42,354 Working capital.......................... 62,399 71,680 57,349 33,567 40,588 Total assets............................. 107,423 102,140 93,594 46,696 50,790 Long-term debt........................... 14,751 19,961 18,585 12,285 2,324 Convertible subordinated debentures...... 36,628 33,953 31,279 -- -- Accumulated deficit...................... (277,744) (177,594) (140,281) (76,108) (49,029) Total stockholders' equity............... 34,349 34,461 28,071 26,335 42,934
43 45 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This annual report on Form 10-K may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed in Item 1 above at "Risks and Uncertainties." While this outlook represents management's current judgment on the future direction of the business, such risks and uncertainties could cause actual results to differ materially from any future performance suggested below. The Company undertakes no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date hereof. OVERVIEW Since January 1989, the Company has devoted substantially all of its resources to its intracellular receptor ("IR") and Signal Transducers and Activators of Transcription drug discovery and development programs. The Company has been unprofitable since its inception and expects to incur substantial additional operating losses due to continued requirements for research and development, preclinical testing, clinical trials, regulatory activities, establishment of manufacturing processes and sales and marketing capabilities until the approval and commercialization of the Company's products generate sufficient revenues, expected in 1999. The Company expects that losses will fluctuate from quarter to quarter as a result of differences in the timing of expenses incurred and the revenues earned from collaborative arrangements. Some of these fluctuations may be significant. As of December 31, 1997, the Company's accumulated deficit was approximately $277.7 million. In May 1995, Glycomed Incorporated ("Glycomed") was merged into a wholly-owned subsidiary of the Company ("the Merger"). Glycomed is a biopharmaceutical company conducting research and development of pharmaceuticals based on biological activities of complex carbohydrates. The Merger was accounted for using the purchase method of accounting. The excess of the purchase price over the fair value of the net assets acquired was allocated to in-process technology and was written off, resulting in a one time non-cash charge to results of operations of approximately $19.6 million. The results of operations of Glycomed are included in the Company's consolidated results of operations from the date of the Merger. In December 1994, the Company and Allergan, Inc. ("Allergan") formed Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT") to continue the research and development activities previously conducted by the Allergan Ligand Joint Venture (the "Joint Venture"). In June 1995, the Company and ALRT completed a public offering of 3,250,000 units (the "Units") with aggregate proceeds of $32.5 million (the "ALRT Offering") and cash contributions by Allergan and the Company of $50.0 million and $17.5 million, respectively, providing for net proceeds of $94.3 million for retinoid product research and development. Each Unit consisted of one share of ALRT's callable common stock ("Callable Common Stock") and two warrants, each warrant entitling the holder to purchase one share of the Common Stock of the Company. The Company's $17.5 million cash contribution resulted in a one-time charge to operations. The Company also recorded a warrant subscription receivable and corresponding increase in paid-in capital of $5.9 million pursuant to the ALRT Offering. From June 3, 1995, through September 23, 1997 cash received from ALRT pursuant to Research and Development Agreement was prorated between contract revenue and warrant subscription receivable based on their respective values. In September 1997, the Company and Allergan exercised their respective options to purchase all of the Callable Common Stock (the "Stock Purchase Option") and certain assets (the "Asset Purchase Option") of ALRT. The Company's exercise of the Stock Purchase Option required the issuance of 3,166,567 shares of the Company's Common Stock along with cash payments totaling $25.0 million, to holders of the Callable Common Stock in November 1997. Allergen's exercise of the Asset Purchase Option required a cash payment of $8.9 million to ALRT in November 1997, which was used by the Company to pay a portion of the Stock Purchase Option. The buyback of ALRT was accounted for using the purchase method of accounting. The excess of the purchase price over the fair value of net assets acquired was allocated to in-process technology and written off, resulting in a one time noncash charge to results of operations of $65.0 million. 44 46 In November 1997, the Company initiated a strategic alliance with Eli Lilly and Company ("Lilly") for the discovery and development of products based upon Ligands' IR technology. The collaboration focuses on products with broad applications across metabolic diseases, including diabetes, obesity, dislipidemia, insulin resistance and cardiovascular disease associated with insulin resistance and obesity. The alliance provided a $31.2 million equity investment by Lilly in the Company, $7.2 million of research revenue in 1997, an upfront non-refundable milestone payment of $12.5 million and could provide the Company with up to $49 million in research funding over five years (the "Lilly Collaboration"). RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 ("1997"), AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 ("1996") The Company had revenues of $51.7 million for 1997 compared to revenues of $36.8 million for 1996. The increase in revenues is primarily due to the Lilly Collaboration revenues offset by decreased revenues from the research and development collaboration with Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products Corporation ("AHP"), due to a one-time payment of $1.5 million in 1996, which expanded and amended the research and development agreement, as well as a $1.3 million milestone payment received from Pfizer Inc. ("Pfizer") in 1996. Revenues in 1997 were derived from the Company's research and development agreements with (i) Lilly of $19.7 million, (ii) ALRT of $19.0 million, (iii) AHP of $4.0 million, (iv) SmithKline Beecham Corporation ("SmithKline Beecham") of $3.2 million, (v) Sankyo Company, Ltd. ("Sankyo") of $2.3 million, (vi) Abbott Laboratories ("Abbott") of $1.7 million, (vii) Glaxo-Wellcome plc ("Glaxo") of $1.3 million and product sales of Ligand (Canada) in-licensed products of $418,000. Revenues for 1996 were derived from the Company's research and development agreements with (i) ALRT of $18.6 million, (ii) AHP of $6.9 million, (iii) Sankyo of $2.7 million, (iv) Abbott of $2.5 million, (v) SmithKline Beecham of $2.4 million, (vi) Glaxo of $2.1 million as well as from a milestone payment received from Pfizer of $1.3 million, products sales of Ligand (Canada) in-licensed products of $207,000 and revenues from a National Institutes of Health ("NIH") grant of $99,000. For 1997, research and development expenses increased to $72.4 million from $59.5 million in 1996. These expenses increased primarily due to expansion of the Company's clinical and development activities, as well as related additions of clinical and development personnel. Selling, general and administrative expenses decreased to $10.1 million in 1997 from $10.2 million in 1996. The decrease was primarily attributable to higher legal expenses incurred in 1996 related to the settlement of future product rights litigation offset by additions to personnel in 1997 to support expanded clinical and development activities. Interest income was $3.7 million for 1997 and 1996. Interest expense decreased slightly to $8.1 million for 1997, from $8.2 million in 1996, due to conversion of $7.5 million convertible notes from AHP to equity in 1997, offset by the addition of $2.5 million of convertible notes from SmithKline Beecham in 1997 and increases in capital lease obligations used to finance equipment. A one-time charge of $65.0 million was incurred in 1997 for the write off of in-process technology related to the exercise of the Stock Purchase Option. The Company has significant net operating loss carry forwards for federal and state income taxes. See Note 13 to Consolidated Financial Statements. YEAR ENDED DECEMBER 31, 1996 ("1996"), AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1995 ("1995") The Company had revenues of $36.8 million for 1996 compared to revenues of $24.5 million for 1995. The increase in revenues is primarily due to increased collaborative research and development revenues from ALRT, milestone revenues from Pfizer, increased revenues under an expanded and amended research and development agreement entered into in January 1996 (which began in September 1994) with AHP, and a full year effect of the collaborative research agreement with Sankyo (which became effective the date of the Merger). Revenues in 1996 were derived from the Company's research and development agreements with (i) ALRT of $18.6 million, (ii) AHP of $6.9 million, (iii) Sankyo of $2.7 million, (iv) Abbott of $2.5 million, (v) SmithKline Beecham of $2.4 million, (vi) Glaxo of $2.1 million, as well as from milestone revenues from Pfizer of $1.3 million, product sales of Ligand (Canada) in-licensed products of $207,000 and revenues from 45 47 an NIH grant of $99,000. Revenues in 1995 were derived from the Company's research and development agreements with (i) ALRT of $12.0 million, (ii) AHP of $4.0 million, (iii) Abbott of $2.6 million, (iv) Glaxo of $2.1 million, (v) SmithKline Beecham of $2.1 million, (vi) Sankyo of $1.7 million, and from product sales of Ligand (Canada) in-licensed products of $120,000. For 1996, research and development expenses increased to $59.5 million from $41.6 million in 1995. These expenses increased due to expansion of the Company's clinical and development activities, and expanded collaborative research programs, related additions of clinical, development and research personnel and inclusion of the cost of Glycomed's operations for a full year in 1996. Selling, general and administrative expenses increased to $10.2 million in 1996 from $8.2 million in 1995. The increase was primarily due to additions to personnel to support clinical, development and research programs, as well as expanded sales and marketing activities. Interest income increased slightly to $3.7 million in 1996 from $3.6 million in 1995. Increases in interest income were a result of the completion of a public offering of approximately $35.3 million in October 1996, and increased research revenues, offset by usage of cash to support expansion activities. Interest expense increased to $8.2 million in 1996 from $5.4 million in 1995. The increase was primarily due to interest required under Glycomed's Convertible Subordinated Debentures ("Debentures"), accretion of debt discount under the Debentures and capital lease obligations used to finance equipment. One-time charges of $19.6 million and $17.5 million were incurred in 1995 due to the Merger and ALRT offering, respectively. The Company has significant net operating loss carry forwards for federal and state income taxes. See Note 13 to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations through private and public offerings of its equity securities, collaborative research revenues, capital and operating lease transactions, issuance of convertible notes, investment income and product sales. From inception through December 1997, the Company has raised $195.7 million from sales of equity securities: $78.2 million from the Company's public offerings and an aggregate of $117.5 million from private placements and the exercise of options and warrants. In March 1997, July 1997 and again in December 1997 the Company converted $3.8 million, $2.5 million and $1.3 million respectively, of the convertible notes outstanding to AHP into 374,626, 249,749 and 124,875 shares, respectively, of Common Stock at a $10.01 conversion price, resulting in an outstanding balance of convertible notes to AHP of $3.8 million. In February 1997, SmithKline Beecham provided a third installment equity investment of $2.5 million by purchasing 164,474 shares of Common Stock as a result of its election to expand the scope of research under its research agreement with the Company. The final installment of $2.5 million was provided in October 1997 to the Company as a convertible note as a result of SmithKline Beecham's election to extend the collaboration. The note is convertible into Common Stock at $13.56 per share and is due October 2002 unless converted into Common Stock earlier. The interest rate on the note is payable semi-annually at prime. As of December 31, 1997, the Company had acquired an aggregate of $22.0 million in property, laboratory and office equipment, and $4.7 million in tenant leasehold improvements, substantially all of which has been funded through capital lease and equipment note obligations and which also includes laboratory and office equipment acquired in the Merger. In addition, the Company leases its office and laboratory facilities under operating leases. In July 1994, the Company entered into a long-term lease related to the construction of a new laboratory facility, which was completed and occupied in August 1995. In March 1997, the Company entered into a long-term lease, related to a second build-to-suit facility and loaned the construction partnership $3.7 million at an interest rate of 8.5% which will be paid back monthly over a 10-year period. In November 1997, the Company closed its Glycomed facility in Alameda at the expiration of the leases and Glycomed's assets and programs were integrated into Ligand's operations. At the end of 1997, one of the Company's main operating lease agreements for office and research facilities expired, at which time the Company moved into its second build-to-suit facility. In February 1997, the Company signed a master lease 46 48 agreement to finance future capital equipment up to $1.5 million, and in July 1997, the master lease agreement was extended to December 1998 to include up to an additional $4.5 million. Each individual schedule under the extended master lease agreement will be paid back monthly with interest over a five-year period. As of December 31, 1997, the Company had $3.6 million available to finance future capital equipment. Working capital decreased to $62.4 million as of December 31, 1997, from $71.7 million at the end of 1996. The decrease in working capital resulted from an increase in accrued liabilities relating to the increase in operating expenses, previously described. Cash and cash equivalents, short-term investments and restricted cash increased to $86.3 million at December 31, 1997 from $84.2 million at December 31, 1996, due to increases in cash related to the Lilly Collaboration and the issuance of convertible notes to SmithKline Beecham, offset by increases in operating expenses, as described above, and exercise of the Stock Purchase Option. The Company primarily invests its cash in United States government and investment grade corporate debt securities. The Company believes that its available cash, cash equivalents, marketable securities and existing sources of funding will be adequate to satisfy its anticipated capital requirements through 1999. The Company's future capital requirements will depend on many factors, including the pace of scientific progress in research and development programs, the magnitude of these programs, the scope and results of preclinical testing and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims, competing technological and market developments, the ability to establish additional collaborations, changes in the existing collaborations, the cost of manufacturing scale-up and the effectiveness of the Company's commercialization activities. YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, many companies' software and computer systems may need to be upgraded or replaced in order to comply with such "Year 2000" requirements. Certain of the Company's internal computer systems are not year 2000 compliant, and the Company utilizes third-party equipment and software that may not be Year 2000 compliant. The Company has commenced taking actions to correct or convert such internal systems and is in the early stages of conducting an audit of its third-party suppliers as to the Year 2000 compliance of their systems. The Company does not believe that the cost of these actions will have a material adverse affect on the Company's business, financial condition or operating results. However, there can be no assurance that a failure of the Company's internal computer systems or of third-party equipment or software used by the Company, or of systems maintained by the Company's suppliers, to be Year 2000 compliant will not have a material adverse effect on the Company's business, financial condition or operating results. In addition, there can be no assurance that adverse changes in the purchasing patterns of the Company's potential customers as a result of Year 2000 issues affecting such customers will not have a material adverse effect on the Company's business, financial condition or results of operations. These expenditures may result in reduced funds available to purchase the Company's products which could have a material adverse effect on the Company's business, operating results and financial condition. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and supplementary data of the Company required by this item are set forth at the pages indicated in Item 14 (a)(1). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 47 49 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The sections labeled "Election of Directors", "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" appearing in the Company's Proxy Statement to be delivered to stockholders in connection with the 1998 Annual Meeting of Stockholders are incorporated herein by reference (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The section labeled "Executive Compensation and Other Information" appearing in the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The sections labeled "Principal Stockholders" and "Security Ownership of Directors and Management" appearing in the Proxy Statement are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The sections labeled "Executive Compensation and Other Information" and "Certain Relationships and Related Transactions" appearing in the Proxy Statement are incorporated herein by reference. 48 50 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS The financial statements required by this item are submitted in a separate section beginning on Page F-1 of this report. CONSOLIDATED FINANCIAL STATEMENTS OF LIGAND PHARMACEUTICALS INCORPORATED Report of Ernst & Young LLP, Independent Auditors........... F-2 Consolidated Balance Sheets at December 31, 1997 and 1996... F-3 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1997......................................... F-4 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1997..... F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1997............... F-6 Notes to Consolidated Financial Statements.................. F-7
(b) REPORTS ON FORM 8-K. There were no reports on Form 8-K filed by the Registrant during the fourth quarter of the fiscal year ended December 31, 1997. (c) EXHIBITS.
EXHIBIT NO. DESCRIPTION ------- ----------- # 2.1 Agreement of Merger, dated February 7, 1995 by and among Ligand Pharmaceuticals Incorporated, LG Acquisition Corp. and Glycomed Incorporated (other Exhibits omitted, but will be filed by the Company with the Commission upon request). # 2.2 Form of Plan of Merger. # 3.2 Amended and Restated Certificate of Incorporation of the Company. & 3.3 Bylaws of the Company, as amended. x 3.4 Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Ligand Pharmaceuticals Incorporated. (Exhibit 3.1). * 4.1 Specimen stock certificate for shares of Common Stock of the Company. #10.1 The Company's 1992 Stock Option/Stock Issuance Plan, as amended. *10.2 Form of Stock Option Agreement. *10.3 Form of Stock Issuance Agreement. *10.7 The Company's 1988 Stock Option Plan, as amended. *10.8 Form of Incentive Stock Option Agreement (Installment Vesting). *10.9 Form of Non-Qualified Stock Option Agreement (Installment Vesting). *10.10 Form of Consultant Non-Qualified Stock Option Agreement (Immediate Vesting). *10.12 1992 Employee Stock Purchase Plan. *10.13 Form of Stock Purchase Agreement.
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EXHIBIT NO. DESCRIPTION ------- ----------- *10.29 Consulting Agreement, dated October 20, 1988, between the Company and Dr. Ronald M. Evans, as amended by Amendment to Consulting Agreement, dated August 1, 1991, and Second Amendment to Consulting Agreement, dated March 6, 1992. *10.30 Form of Proprietary Information and Inventions Agreement. Research and License. *10.31 Agreement, dated March 9, 1992, between the Company and Baylor College of Medicine (with certain confidential portions omitted). *10.33 License Agreement, dated November 14, 1991, between the Company and Rockefeller University (with certain confidential portions omitted). *10.34 License Agreement and Bailment, dated July 22, 1991, between the Company and the Regents of the University of California (with certain confidential portions omitted). *10.35 Agreement, dated May 1, 1991, between the Company and Pfizer Inc (with certain confidential portions omitted). *10.36 License Agreement, dated July 3, 1990, between the Company and the Brigham and Woman's Hospital, Inc. (with certain confidential portions omitted). *10.37 Compound Evaluation Agreement, dated May 17, 1990, between the Company and SRI International (with certain confidential portions omitted). *10.38 License Agreement, dated January 5, 1990, between the Company and the University of North Carolina at Chapel Hill (with certain confidential portions omitted). *10.40 License Agreement, dated January 4, 1990, between the Company and Baylor College of Medicine (with certain confidential portions omitted). *10.41 License Agreement, dated October 1, 1989, between the Company and Institute Pasteur (with certain confidential portions omitted). *10.42 Sublicense Agreement, dated September 13, 1989, between the Company and AndroBio Corporation (with certain confidential portions omitted). *10.43 License Agreement, dated June 23, 1989, between the Company and La Jolla Cancer Research Foundation (with certain confidential portions omitted). *10.44 License Agreement, dated October 20, 1988, between the Company and the Institute for Biological Studies, as amended by Amendment to License Agreement dated September 15, 1989, Second Amendment to License Agreement, dated December 1, 1989 and Third Amendment to License Agreement dated October 20, 1990 (with certain confidential portions omitted). *10.45 Agreement dated June 12, 1989, between the Company and the Regents of the University of California. *10.46 Form of Indemnification Agreement between the Company and each of its directors. *10.47 Form of Indemnification Agreement between the Company and each of its officers. *10.50 Consulting Agreement, dated October 1, 1991, between the Company and Dr. Bert W. O'Malley.
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EXHIBIT NO. DESCRIPTION ------- ----------- *10.53 Stock and Warrant Purchase Agreement, dated June 30, 1992 between the Company and Allergan, Inc. and Allergan Pharmaceuticals (Ireland) Ltd., Inc. *10.58 Stock Purchase Agreement, dated September 9, 1992, between the Company and Glaxo, Inc. *10.59 Research and Development Agreement, dated September 9, 1992, between the Company and Glaxo, Inc. (with certain confidential portions omitted). *10.60 Stock Transfer Agreement, dated September 30, 1992, between the Company and the Rockefeller University. *10.61 Stock Transfer Agreement, dated September 30, 1992, between the Company and New York University. *10.62 License Agreement, dated September 30, 1992, between the Company and the Rockefeller University (with certain confidential portions omitted). *10.63 Professional Services Agreement, dated September 30, 1992, between the Company and Dr. James E. Darnell. *10.64 Letter Agreement, dated August 24, 1992, between the Company and Dr. Howard T. Holden. *10.65 Letter Agreement, dated August 20, 1992, between the Company and Dr. George Gill. *10.66 Letter Agreement, dated September 3, 1992, between the Company and Dr. Lloyd E. Flanders. *10.67 Letter Agreement, dated September 11, 1992, between the Company and Mr. Paul Maier. !!10.69 Form of Automatic Grant Option Agreement. **10.73 Supplementary Agreement, dated October 1, 1993, between the Company and Pfizer, Inc. to Agreement, dated May 1, 1991. !10.76 Amended Registration Rights Agreement, dated June 24, 1994, between the Company and the individuals listed on attached Schedule A, as amended (Exhibit 4.1). !10.77 First Addendum to Amended Registration Rights Agreement, dated July 6, 1994, between Company and Abbott Laboratories. (Exhibit 4.2). ***10.78 Research, Development and License Agreement, dated July 6, 1994, between the Company and Abbott Laboratories (with certain confidential portions omitted). (Exhibit 10.75). ***10.79 Stock and Note Purchase Agreement, dated September 2, 1994, between the Company and American Home Products Corporation (with certain confidential portions omitted). ***10.80 Unsecured Convertible Promissory Note dated September 2, 1994, in the face amount of $10,000,000 executed by the Company in favor of American Home Products Corporation (with certain confidential portions omitted). (Exhibit 10.78). ***10.81 Second Addendum to Amended Registration Rights Agreement, dated September 2, 1994, between the Company and American Home Products Corporation.
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EXHIBIT NO. DESCRIPTION ------- ----------- ***10.82 Research, Development and License Agreement, dated September 2, 1994, between the Company and American Home Products Corporation, as represented by its Wyeth-Ayerst Research Division (with certain confidential portions omitted). (Exhibit 10.77). ***10.83 Option Agreement, dated September 2, 1994, between the Company and American Home Products Corporation, as represented by its Wyeth-Ayerst Research Division (with certain confidential portions omitted). (Exhibit 10.80). ***10.84 Distribution and Marketing Agreement, dated September 16, 1994, between the Company and Cetus Oncology Corporation, a wholly owned subsidiary of the Chiron Corporation (with certain confidential portions omitted). (Exhibit 10.82). &10.93 Indemnity Agreement, dated June 3, 1995, between the Company, Allergan, Inc. and Allergan Ligand Retinoid Therapeutics, Inc. &10.94 Tax Allocation Agreement, dated June 3, 1995, between the Company, Allergan, Inc. and Allergan Ligand Retinoid Therapeutics, Inc. &10.95 Stock Purchase Agreement, dated June 3, 1995, between the Company, Allergan, Inc. and Allergan Pharmaceuticals (Ireland), Ltd. &10.97 Research, Development and License Agreement, dated December 29, 1994, between SmithKline Beecham Corporation and the Company (with certain confidential portions omitted). &10.98 Stock and Note Purchase Agreement, dated February 2, 1995, between SmithKline Beecham Corporation, S.R. One Limited and the Company (with certain confidential portions omitted). &10.99 Third Addendum to Amended Registration Rights Agreement, dated February 3, 1995, between S. R. One, Limited and the Company. #10.100 PHOTOFRIN(R) Distribution Agreement, dated March 8, 1995, between the Company and Quadra Logic Technologies Inc. (with certain confidential portions omitted). 10.119(1) Option and Development Agreement, dated August 15, 1990, between Glycomed and Dr. Richard E. Galardy and Dr. Damian Grobelny with exhibit thereto (with certain portions omitted). (Exhibit 10 10.20). 10.120(1) Option and Development Agreement, dated November 27, 1989, between Glycomed and the President and Fellows of Harvard College with appendices thereto (with certain confidential portions omitted). (Exhibit 10.21) 10.121(1) Option and Development Agreement, dated January 1, 1991, between Glycomed and UAB Research Foundation with exhibits thereto (with certain confidential portions omitted). (Exhibit 10.22). 10.122(1) Joint Venture Agreement, dated December 18, 1990, among Glycomed, Glyko, Inc., Millipore Corporation, Astroscan, Ltd., Astromed, Ltd., Gwynn R. Williams and John Klock, M.D., with exhibits thereto (with certain confidential portions omitted). (Exhibit 10.23). 10.127(2) Research and License Agreement, dated April 29, 1992, between Glycomed and the Alberta Research Council with Appendix thereto (with certain confidential portions omitted). (Exhibit 10.28). 10.130(3) Amendment to Research and License Agreement, dated July 12, 1993, (confidential portions omitted). (Exhibit 10.32).
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EXHIBIT NO. DESCRIPTION ------- ----------- 10.131(4) Amendments to Research and License Agreement, dated October 22, 1993, December 16, 19 and May 9, 1994 between Glycomed and the Alberta Research Council (with certain confidential portions omitted). (Exhibit 10.33). 10.132(4) License Agreement, dated February 14, 1994 between Glycomed and Sankyo Company, Ltd., for the Far East marketing rights of ophthalmic indications of Galardin(TM) MPI and analogs (with certain confidential portions omitted). (Exhibit 10.34). 10.133(4) Collaborative Technology Research and Development Agreement between Glycomed and Sankyo Company, Ltd., dated June 27, 1994 (with certain confidential portions omitted). (Exhibit 10.35). 10.136(5) Amendment to Research and License Agreement, dated September 22, 1994 between Glycomed and Alberta Research Council (with certain confidential portions omitted). (Exhibit 10.38). #10.137 First Supplemental Indenture among the Company, Glycomed and Chemical Trust Company of California, Trustee. (Exhibit 10.133). %%10.140 Promissory Notes, General Security Agreements and a Credit Terms and Conditions letter dated March 31, 1995, between the Company and Imperial Bank (Exhibit 10.101). -10.142 Stock Purchase Agreement, dated June 27, 1995, between the Company and Sankyo Company, Ltd. -10.143 Fifth Addendum to Amended Registration Rights Agreement, dated September 11, 1995 between the Company and Sankyo Company Limited. -10.144 Stock Purchase Agreement, dated August 28, 1995, between the Company and Abbott Laboratories. -10.145 Sixth Addendum to Amended Registration Rights Agreement, dated August 31, 1995, between the Company and Abbott Laboratories. -10.146 Amendment to Research and Development Agreement, dated January 16, 1996, between the Company and American Home Products Corporation, as amended. -10.147 Amendment to Stock Purchase Agreement, dated January 16, 1996, between the Company and American Home Products Corporation. -10.148 Lease, dated July 6, 1994, between the Company and Chevron/Nexus partnership, First Amendment to lease dated July 6, 1994. x10.149 Successor Employment Agreement, signed May 1, 1996, between the Company and David E. Robinson. 10.150(6) Master Lease Agreement, signed May 30, 1996, between the Company and USL Capital Corporation. x10.151 Settlement Agreement and Mutual Release of all Claims, signed April 20, 1996, between the Company and Pfizer, Inc. (with certain confidential portions omitted). x10.152 Letter Amendment to Abbott Agreement, dated March 14, 1996, between the Company and Abbott Laboratories (with certain confidential portions omitted). Xx10.153 Letter Agreement, dated August 8, 1996, between the Company and Dr. Andres Negro-Vilar.
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EXHIBIT NO. DESCRIPTION ------- ----------- ##10.154 Preferred Shares Rights Agreement, dated as of September 13, 1996, by and between Ligand Pharmaceuticals Incorporated and Wells Fargo Bank, N.A. (Exhibit 10.1). 10.155(6) Letter Agreement, dated November 4, 1996, between the Company and William Pettit. 10.156(6) Letter Agreement, dated February 6, 1997, between the Company and Russell L. Allen. 10.157(6) Master Lease Agreement, signed February 13, 1997, between the Company and Lease Management Services. 10.158(6) Lease, dated March 7, 1997, between the Company and Nexus Equity VI LLC. 10.159(6) Eighth Addendum to amended registration rights agreement, dated June 24, 1994, as amended between Ligand Pharmaceuticals and S.R. One, Limited and is effective as of February 10, 1997. 10.160(6) Seventh Addendum to amended registration rights agreement, dated June 24, 1994, as amended between Ligand Pharmaceuticals and S.R. One, Limited and is effective as of November 10, 1995. 10.161(7) Settlement Agreement, License and Mutual General Release between Ligand Pharmaceuticals and SRI/LJCRF, dated August 23, 1995 (with certain confidential portions omitted). 10.162(8) Limited Extension of Collaborative Technology Research, Option and Development Agreement between Ligand Pharmaceuticals and Sankyo Company Limited, dated June 24, 1997. 10.163(8) Extension of Master Lease Agreement between Lease Management Services and Ligand Pharmaceuticals dated July 29, 1997. 10.164(9) Third Amendment to Agreement, dated September 2, 1997, between the Company and American Home Products Corporation. 10.165 Amended and Restated Technology Cross License Agreement, dated September 24, 1997, among the Company, Allergan, Inc. and Allergan Ligand Retinoid Therapeutics, Inc. 10.166 Transition Agreement, dated September 24, 1997, among the Company, Allergan, Inc. and Allergan Ligand Retinoid Therapeutics, Inc. 10.167 Development and License Agreement, dated November 25, 1997, between the Company and Eli Lilly and Company (with certain confidential portions omitted). 10.168 Collaboration Agreement, dated November 25, 1997, among the Company, Eli Lilly and Company, and Allergan Ligand Retinoid Therapeutics, Inc. (with certain confidential portions omitted). 10.169 Option and Wholesale Purchase Agreement, dated November 25, 1997, between the Company and Eli Lilly and Company (with certain confidential portions omitted). 10.170 Stock Purchase Agreement, dated November 25, 1997, between the Company and Eli Lilly and Company. 10.171 First Amendment to Option and Wholesale Purchase Agreement dated February 23, 1998, between the Company and Eli Lilly and Company (with certain confidential portions omitted).
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EXHIBIT NO. DESCRIPTION ------- ----------- 10.172 Second Amendment to Option and Wholesale Purchase Agreement, dated March 16, 1998, between the Company and Eli Lilly and Company (with certain confidential portions omitted). 21.1 Subsidiaries of Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 24.1 Power of Attorney (See Page 57). 27.1 Financial Data Schedule.
- --------------- * These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibit filed with the Company's Registration Statement on Form S-1 (No. 33-47257) filed on April 16, 1992 as amended. % These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibit filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1992. ** These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibit filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1993. *** These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibit (except as otherwise noted) filed with the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1994. ! These exhibits were previously filed as part of, and are hereby incorporated by reference to, the exhibit filed with the Company's Form 8-K, filed on July 14, 1994. !! This exhibit was previously filed as part of, and is hereby incorporated by reference to Exhibit 99.1 filed with the Company's Form S-8 (No. 33-85366), filed on October 17, 1994. & These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibit filed with the Registration Statement on Form S-1/S-3 (No. 33-87598 and 33-87600) filed on December 20, 1994, as amended. # These exhibits were previously filed as part of, and are hereby incorporated by reference to the numbered exhibit filed with the Registration Statement on Form S-4 (No. 33-90160) filed on March 9, 1995, as amended. %% This exhibit was previously filed as part of, and are hereby incorporated by reference to the same numbered exhibit filed with the Company's Quarterly report on Form 10-Q for the period ended September 30, 1995. - - These exhibits were filed previously, and are hereby incorporated by reference to the same numbered exhibit filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1995. x These exhibits were previously filed as part of, and are hereby incorporated by reference to the same numbered exhibit filed with the Company's Quarterly report on Form 10-Q for the period ended June 30, 1996. Xx This exhibit was previously filed as part of, and are hereby incorporated by reference at the same numbered exhibit filed with the Company's Quarterly report on Form 10-Q for the period ended September 30, 1996. ## These exhibits were previously filed as part of, and are hereby incorporated by reference, the same numbered exhibit filed with the Company's Registration Statement on Form S-3 (No. 333-12603) filed on September 25, 1996, as amended. (1) Filed as an exhibit to Glycomed's Registration Statement on Form S-1 (No. 33-39961) filed on or amendments thereto and incorporated herein by reference. 55 57 (2) Filed as an exhibit to Glycomed's Annual Report on Form 10-K (File No. 0-19161) filed on September 25, 1992 and incorporated herein by reference. (3) Filed as an exhibit to Glycomed's Annual Report on Form 10-K (File No. 0-19161) filed on September 13, 1993 and incorporated herein by reference. (4) Filed as an amendment to Glycomed's Annual Report on Form 10-K (File No. 0-19161) filed on September 27, 1994 and incorporated herein by reference. (5) Filed as an exhibit to Glycomed's Quarterly Report on Form 10-Q (File No. 0-19161) filed on February 10, 1995 and incorporated herein by reference. (6) This exhibit was previously filed as part of, and is hereby incorporated by reference to the same numbered exhibit filed with the Company's Annual Report on Form 10-K for the period ended December 31, 1996. (7) This exhibit was previously filed as part of, and is hereby incorporated by reference to the same numbered exhibit filed with the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997. (8) This exhibit was previously filed as part of, and is hereby incorporated by reference to the same same numbered exhibit filed with the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997. (9) This exhibit was previously filed as part of, and is hereby incorporated by reference to the same numbered exhibit filed with the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997. 56 58 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LIGAND PHARMACEUTICALS INCORPORATED By: /s/ DAVID E. ROBINSON ------------------------------------ David E. Robinson, President and Chief Executive Officer Date: March 31, 1998 POWER OF ATTORNEY Know all men by these presents, that each person whose signature appears below constitutes and appoints David E. Robinson or Paul V. Maier, his or her attorney-in-fact, with power of substitution in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that the attorney-in-fact or his or her substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ DAVID E. ROBINSON Chairman of the Board, President, March 31, 1998 - --------------------------------------- Chief Executive Officer and Director David E. Robinson (Principal Executive Officer) /s/ PAUL V. MAIER Senior Vice President, Chief March 31, 1998 - --------------------------------------- Financial Officer and Treasurer Paul V. Maier (Principal Financial and Accounting Officer) Director - --------------------------------------- Henry F. Blissenbach /s/ ALEXANDER D. CROSS Director March 30, 1998 - --------------------------------------- Alexander D. Cross /s/ JOHN GROOM Director March 30, 1998 - --------------------------------------- John Groom /s/ IRVING S. JOHNSON Director March 30, 1998 - --------------------------------------- Irving S. Johnson /s/ CARL C. PECK Director March 30, 1998 - --------------------------------------- Carl C. Peck /s/ VICTORIA R. FASH Director March 30, 1998 - --------------------------------------- Victoria R. Fash
57 59 INDEX TO FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors........... F-2 Consolidated Balance Sheets................................. F-3 Consolidated Statements of Operations....................... F-4 Consolidated Statements of Stockholders' Equity............. F-5 Consolidated Statements of Cash Flows....................... F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 60 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Ligand Pharmaceuticals Incorporated We have audited the accompanying consolidated balance sheets of Ligand Pharmaceuticals Incorporated as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ligand Pharmaceuticals Incorporated at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP January 30, 1998 F-2 61 LIGAND PHARMACEUTICALS INCORPORATED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
DECEMBER 31, ---------------------- 1997 1996 --------- --------- Current assets: Cash and cash equivalents................................. $ 62,252 $ 34,830 Short-term investments.................................... 20,978 45,822 Receivable from a related party........................... -- 3,087 Other current assets...................................... 864 1,706 --------- --------- Total current assets.............................. 84,094 85,445 Restricted short-term investments........................... 3,057 3,527 Property and equipment, net................................. 14,853 11,680 Notes receivable from officers and employees................ 559 534 Other assets................................................ 4,860 954 --------- --------- $ 107,423 $ 102,140 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 10,717 $ 4,137 Accrued liabilities....................................... 5,609 4,870 Deferred revenue.......................................... 2,616 2,151 Current portion of obligations under capital leases....... 2,753 2,607 --------- --------- Total current liabilities......................... 21,695 13,765 Long-term obligations under capital leases.................. 8,501 8,711 Convertible subordinated debentures......................... 36,628 33,953 Convertible note............................................ 6,250 11,250 Commitments Stockholders' equity: Convertible preferred stock, $0.001 par value, 5,000,000 shares authorized; none issued......................... -- -- Common stock, $0.001 par value; 80,000,000 shares authorized, 38,504,459 shares and 31,799,617 shares issued at December 31, 1997 and 1996, respectively..... 39 32 Paid-in capital........................................... 311,681 214,887 Warrant subscription receivable........................... -- (2,453) Adjustment for unrealized gains (losses) on available-for-sale securities.......................... 384 (78) Accumulated deficit....................................... (277,744) (177,594) Deferred compensation and consulting...................... -- (322) --------- --------- 34,360 34,472 Less treasury stock, at cost (1,114 shares in 1997 and 1996).................................................. (11) (11) --------- --------- Total stockholders' equity................................ 34,349 34,461 --------- --------- $ 107,423 $ 102,140 ========= =========
See accompanying notes. F-3 62 LIGAND PHARMACEUTICALS INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 ---------- ---------- ---------- Revenues: Collaborative research and development: Related parties................................... $ 18,997 $ 18,641 $ 11,972 Unrelated parties................................. 32,284 17,994 12,424 Other................................................ 418 207 120 ---------- ---------- ---------- 51,699 36,842 24,516 Costs and expenses: Research and development............................. 72,426 59,494 41,636 Selling, general and administrative.................. 10,108 10,205 8,181 Write-off of acquired in-process technology.......... 64,970 -- 19,564 ALRT contribution.................................... -- -- 17,500 ---------- ---------- ---------- Total operating expenses..................... 147,504 69,699 86,881 ---------- ---------- ---------- Loss from operations................................... (95,805) (32,857) (62,365) Interest income........................................ 3,743 3,704 3,603 Interest expense....................................... (8,088) (8,160) (5,410) ---------- ---------- ---------- Net loss............................................... $ (100,150) $ (37,313) $ (64,172) ========== ========== ========== Basic and diluted net loss per share................... $ (3.02) $ (1.30) $ (2.70) ========== ========== ========== Shares used in computing net loss per share............ 33,128,372 28,780,914 23,791,542 ========== ========== ==========
See accompanying notes. F-4 63 LIGAND PHARMACEUTICALS INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE DATA)
ADJUSTMENT FOR UNREALIZED GAINS (LOSSES) ON COMMON STOCK WARRANT AVAILABLE- DEFERRED ------------------- PAID-IN SUBSCRIPTION FOR-SALE ACCUMULATED COMPENSATION AND SHARES AMOUNT CAPITAL RECEIVABLE SECURITIES DEFICIT CONSULTING ---------- ------ -------- ------------ ---------------- ----------- ---------------- Balance at December 31, 1994... 17,954,064 $18 $104,684 $ -- $(727) $ (76,109) $(1,530) Issuance of Common Stock...... 2,903,622 3 20,966 -- -- -- -- Issuance of Common Stock for merger net of transaction costs of $1,235,000......... 6,942,911 7 41,952 -- -- -- -- Amortization of deferred compensation and consulting fees........................ -- -- -- -- -- -- 711 Adjustment for unrealized gains (losses) on available-for-sale securities.................. -- -- -- -- 944 -- -- Purchase of treasury stock.... -- -- -- -- -- -- -- Warrant subscription receivable.................. -- -- 5,850 (5,850) -- -- -- Cash received from ALRT and applied to warrant subscription receivable..... -- -- -- 1,326 -- -- -- Net loss...................... -- -- -- -- -- (64,172) -- ---------- --- -------- ------- ----- --------- ------- Balance at December 31, 1995... 27,800,597 28 173,452 (4,524) 217 (140,281) (819) Issuance of Common Stock...... 3,999,020 4 41,082 -- -- -- -- Amortization of deferred compensation and consulting fees........................ -- -- -- -- -- -- 497 Adjustment for unrealized gains (losses) on available-for-sale securities.................. -- -- -- -- (295) -- -- Receipt of Common Stock for milestone revenue........... -- -- -- -- -- -- -- Retirement of shares.......... -- -- -- -- -- -- -- Purchase of treasury shares... -- -- -- -- -- -- -- Issuance of Common Stock held in Treasury................. -- -- -- -- -- -- -- Option term extension......... -- -- 353 -- -- -- -- Amortization of warrant subscription receivable..... -- -- -- 2,071 -- -- -- Net loss...................... -- -- -- -- -- (37,313) -- ---------- --- -------- ------- ----- --------- ------- Balance at December 31, 1996... 31,799,617 32 214,887 (2,453) (78) (177,594) (322) Issuance of Common Stock...... 6,704,842 7 96,794 -- -- -- -- Amortization of deferred compensation and consulting fees........................ -- -- -- -- -- -- 322 Adjustment of unrealized gains (losses) on available-for-sale securities.................. -- -- -- -- 462 -- -- Amortization of warrant subscription receivable..... -- -- -- 1,535 -- -- -- Write-off of warrant subscription receivable..... -- -- -- 918 -- -- -- Net loss...................... (100,150) ---------- --- -------- ------- ----- --------- ------- Balance at December 31, 1997... 38,504,459 $39 $311,681 $ -- $ 384 $(277,744) $ -- ========== === ======== ======= ===== ========= ======= TREASURY STOCK TOTAL ------------------- STOCKHOLDERS' SHARES AMOUNT EQUITY --------- ------- ------------- Balance at December 31, 1994... (4,952) $ (2) $ 26,334 Issuance of Common Stock...... -- -- 20,969 Issuance of Common Stock for merger net of transaction costs of $1,235,000......... -- -- 41,959 Amortization of deferred compensation and consulting fees........................ -- -- 711 Adjustment for unrealized gains (losses) on available-for-sale securities.................. -- -- 944 Purchase of treasury stock.... (34) -- -- Warrant subscription receivable.................. -- -- -- Cash received from ALRT and applied to warrant subscription receivable..... -- -- 1,326 Net loss...................... -- -- (64,172) --------- ------- --------- Balance at December 31, 1995... (4,986) (2) 28,071 Issuance of Common Stock...... -- -- 41,086 Amortization of deferred compensation and consulting fees........................ -- -- 497 Adjustment for unrealized gains (losses) on available-for-sale securities.................. -- -- (295) Receipt of Common Stock for milestone revenue........... (101,011) (1,320) (1,320) Retirement of shares.......... 101,011 1,320 1,320 Purchase of treasury shares... (3,164) (23) (23) Issuance of Common Stock held in Treasury................. 7,036 14 14 Option term extension......... -- -- 353 Amortization of warrant subscription receivable..... -- -- 2,071 Net loss...................... -- -- (37,313) --------- ------- --------- Balance at December 31, 1996... (1,114) (11) 34,461 Issuance of Common Stock...... -- -- 96,801 Amortization of deferred compensation and consulting fees........................ -- -- 322 Adjustment of unrealized gains (losses) on available-for-sale securities.................. -- -- 462 Amortization of warrant subscription receivable..... -- -- 1,535 Write-off of warrant subscription receivable..... -- -- 918 Net loss...................... (100,150) --------- ------- --------- Balance at December 31, 1997... (1,114) $ (11) $ 34,349 ========= ======= =========
See accompanying notes. F-5 64 LIGAND PHARMACEUTICALS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 --------- -------- -------- OPERATING ACTIVITIES Net loss.................................................... $(100,150) $(37,313) $(64,172) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization.......................... 4,133 3,879 2,687 Amortization of notes receivable from officers and employees............................................. 230 235 339 Amortization of warrant subscription receivable........ 2,453 2,071 1,326 Write-off of acquired in-process technology............ 64,970 -- 19,564 Amortization of deferred compensation and consulting... 322 497 711 Accretion of debt discount............................. 2,675 2,674 1,654 Company stock received for milestone revenue........... -- (1,320) -- Gain on sale of property and equipment................. (6) -- -- Change in operating assets and liabilities, net of Glycomed merger: Other current assets.............................. 856 (1,129) 1,626 Receivable from a related party................... 3,087 (801) (1,128) Accounts payable and accrued liabilities.......... 7,605 (1,638) 380 Deferred revenue.................................. 465 (457) 465 --------- -------- -------- Net cash used in operating activities....................... (13,360) (33,302) (36,548) INVESTING ACTIVITIES Purchases of short-term investments......................... (35,033) (53,123) (17,684) Proceeds from short-term investments........................ 60,339 61,188 37,205 Purchase of property and equipment.......................... (4,278) (399) (175) Proceeds from sale of property and equipment................ 109 -- -- Increase in note receivable from officers and employees..... (270) (350) (135) Payment of notes receivable from officers and employees..... 16 66 -- Increases in deposits and other assets...................... (4,036) (2) (33) Decreases in deposits and other assets...................... 130 118 60 Investment in joint venture................................. -- -- (822) Net cash paid for exercise of ALRT stock purchase option.... (12,661) -- -- Net cash acquired in Glycomed acquisition................... -- -- 10,225 --------- -------- -------- Net cash provided by investing activities................... 4,316 7,498 28,641 FINANCING ACTIVITIES Principal payments on obligations under capital leases...... (3,210) (2,561) (1,448) Net change in restricted short-term investment.............. 470 3,232 (2,043) Net proceeds from the issuance of convertible note.......... 2,500 5,000 -- Net proceeds from sale of common stock...................... 36,706 39,000 19,733 --------- -------- -------- Net cash provided by financing activities................... 36,466 44,671 16,242 --------- -------- -------- Net increase in cash and cash equivalents................... 27,422 18,867 8,335 Cash and cash equivalents at beginning of period............ 34,830 15,963 7,628 --------- -------- -------- Cash and cash equivalents at end of period.................. $ 62,252 $ 34,830 $ 15,963 ========= ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid............................................... $ 5,444 $ 5,559 $ 3,178 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Additions to obligations under capital leases............... $ 3,146 $ 2,888 $ 8,415 Retirement of treasury stock................................ $ -- $ 1,320 $ --
See accompanying notes. F-6 65 LIGAND PHARMACEUTICALS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 1. THE COMPANY Ligand Pharmaceuticals Incorporated, a Delaware corporation (the "Company"), is a biopharmaceutical company primarily committed to the discovery and development of new drugs that regulate hormone activated intracellular receptors and Signal Transducers and Activators of Transcription. The Company includes its wholly owned subsidiaries, Glycomed Incorporated ("Glycomed"), Ligand Pharmaceuticals (Canada) Incorporated, and Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT"). The Company's potential products are in various stages of development. Potential products that appear to be promising at early stages of development may not reach the market for a number of reasons. Substantially all of the Company's revenues to date have been derived from its research and development agreements with major pharmaceutical collaborators. Prior to generating product revenues from these products, the Company must complete the development of its products in the human health care market. No assurance can be given that the Company's product development efforts will be successful, that required regulatory approvals for any indication will be obtained, or that any products, if introduced will be capable of being produced in commercial quantities at reasonable costs or that patient and physician acceptance of these products will be achieved. There can be no assurance that Ligand will successfully commercialize, manufacture or market its products or ever achieve or sustain product revenues or profitability. The Company faces those risks associated with companies whose products are in various stages of development. These risks include, among others, the Company's need for additional financing to complete its research and development programs and commercialize its technologies. The Company expects to incur substantial additional research and development expenses, including continued increases in personnel and costs related to preclinical testing, clinical trials, and sales and marketing expenses related to product sales. The Company intends to seek additional funding sources of capital and liquidity through collaborative arrangements, collaborative research or through public or private financing. There is no assurance such financing would be available under favorable terms, if at all. The Company believes that patents and other proprietary rights are important to its business. The Company's policy is to file patent applications to protect technology, inventions and improvements to its inventions that are considered important to the development of its business. The patent positions of pharmaceutical and biotechnology firms, including the Company, are uncertain and involve complex legal and technical questions for which important legal principles are largely unresolved. 2. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. 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 disclosures made in the accompanying notes to the consolidated financial statements. Actual results could differ from those estimates. Cash, Cash Equivalents and Short-term Investments Cash and cash equivalents consist primarily of cash, certificates of deposits, treasury securities and repurchase agreements with original maturities at the date of acquisition of less than three months. F-7 66 LIGAND PHARMACEUTICALS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 The Company invests its excess cash principally in United States government debt securities, investment grade corporate debt securities and certificates of deposit. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. Loss Per Share Net loss per share is computed using the weighted average number of common shares outstanding. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 128, Earnings Per Share, which is effective for fiscal periods ending after December 15, 1997. SFAS 128 includes a new computation for earnings per share and presentation of basic and diluted earnings per share. The Company retroactively adopted SFAS 128 in the fourth quarter of 1997. Upon adoption, there was no impact on the net loss per share or presentation of net loss per share for any periods previously reported. Accounting for Stock-Based Compensation The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. In January 1996, the Company adopted the disclosure requirements of SFAS 123, Accounting for Stock-Based Compensation (Note 8). New Accounting Standards In June 1997, the Financial Accounting Standards Board issued SFAS 130, Reporting Comprehensive Income and SFAS 131, Segment Information. Both of these standards are effective for fiscal years beginning after December 15, 1997. SFAS 130 requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. The Company's comprehensive income or loss will not be materially different than net income or loss as reported. SFAS 131 amends the requirements for public enterprises to report financial and descriptive information about its reportable operating segments. The Company currently operates in one business and operating segment and does not believe adoption of this standard will have a material impact on the Company's financial statements as reported. Research and Development Revenues and Expenses Collaborative research and development revenues are recorded as earned based on the performance criteria of each contract. Payments received which have not met the appropriate criteria are recorded as deferred revenue. Research and development costs are expensed as incurred. For the years ended December 31, 1997, 1996 and 1995, costs and expenses related to collaborative research and development agreements were $51.3 million, $36.6 million and $24.4 million, respectively. F-8 67 LIGAND PHARMACEUTICALS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 Property and Equipment Property and equipment is stated at cost and consists of the following (in thousands):
DECEMBER 31, -------------------- 1997 1996 -------- -------- Property.................................................... $ 2,649 $ -- Equipment and leasehold improvements........................ 26,662 22,674 Less accumulated depreciation and amortization.............. (14,458) (10,994) -------- -------- Net property and equipment........................ $ 14,853 $ 11,680 ======== ========
Depreciation of equipment and leasehold improvements is computed using the straight-line method over the estimated useful lives of the assets which range from three to fifteen years. Assets acquired pursuant to capital lease arrangements and leasehold improvements are amortized over their estimated useful lives or their related lease term, whichever is shorter. 3. INVESTMENTS Investments are recorded at estimated fair market value at December 31, 1997 and 1996, and consist principally of United States government debt securities, investment grade corporate debt securities and certificates of deposit with maturities at the date of acquisition of three months or longer. The Company has classified all of its investments as available-for-sale securities. The following table summarizes the various investment categories at (in thousands):
DECEMBER 31, 1997 DECEMBER 31, 1996 --------------------------------- --------------------------------- GROSS GROSS UNREALIZED UNREALIZED GAINS ESTIMATED GAINS ESTIMATED COST (LOSSES) FAIR VALUE COST (LOSSES) FAIR VALUE ------- ---------- ---------- ------- ---------- ---------- Available-for-Sale: U.S. Government Securities.... $11,790 $ 9 $11,799 $18,541 $(52) $18,489 Corporate Obligations......... 7,085 2 7,087 22,005 (16) 21,989 Certificates of Deposit....... 2,093 (1) 2,092 5,354 (10) 5,344 ------- ---- ------- ------- ---- ------- 20,968 10 20,978 45,900 (78) 45,822 Certificates of Deposit -- restricted................. 3,057 -- 3,057 3,527 -- 3,527 Equity securities............. 440 374 814 440 -- 440 ------- ---- ------- ------- ---- ------- $24,465 $384 $24,849 $49,867 $(78) $49,789 ======= ==== ======= ======= ==== =======
Equity securities are included in long-term other assets. The realized gains (losses) on sales of available-for-sale securities for the years ended December 31, 1997 and 1996 have not been material. F-9 68 LIGAND PHARMACEUTICALS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 The amortized cost and estimated fair value of debt and marketable securities at December 31, 1997 and 1996, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
DECEMBER 31, 1997 DECEMBER 31, 1996 --------------------- --------------------- ESTIMATED ESTIMATED COST FAIR VALUE COST FAIR VALUE ------- ---------- ------- ---------- Due in one year or less........................... $17,148 $17,151 $15,941 $15,938 Due after one year through three years............ 6,782 6,792 33,388 33,315 Due after three years............................. 94 92 98 96 ------- ------- ------- ------- 24,025 24,035 49,427 49,349 Equity securities................................. 440 814 440 440 ------- ------- ------- ------- $24,465 $24,849 $49,867 $49,789 ======= ======= ======= =======
4. MERGER WITH GLYCOMED In May 1995, Glycomed was merged into a wholly owned subsidiary of the Company ("the Merger"). Glycomed is a biopharmaceutical company conducting research and development of pharmaceuticals based on biological activities of complex carbohydrates. The results of operations of Glycomed are included in the Company's consolidated results of operations with effect from the date of the Merger. Each outstanding share of Glycomed Common Stock was converted into .5301 shares of the Company's Common Stock, resulting in the issuance of 6,942,911 shares of the Company's Common Stock to Glycomed shareholders. The Merger was accounted for using the purchase method of accounting. The excess of the purchase price over the fair value of the net assets acquired was allocated to in-process technology and was written off, resulting in a one-time non-cash charge to results of operations of $19.6 million. Details of the merger are as follows (in thousands): Total consideration: Common stock.............................................. $43,193 Convertible debentures assumed............................ 29,625 Other liabilities assumed................................. 6,897 ------- 79,715 Less: Fair value of assets acquired, including cash, restricted cash and short-term investments of $46,698................ 49,926 Write-off of in-process technology.......................... 19,564 ------- Net cash acquired........................................... $10,225 =======
The common stock issued as consideration was valued at the market price on the date the transaction was consummated. In November 1997, the Company closed Glycomed's Alameda facilities and Glycomed's assets and research programs were integrated into Ligand's operations. F-10 69 LIGAND PHARMACEUTICALS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 5. ACCRUED LIABILITIES Accrued liabilities are comprised of the following (in thousands):
DECEMBER 31, -------------------------------- 1997 1996 -------------- -------------- Accrued legal......................................... $ 451 $ 463 Accrued interest...................................... 2,088 2,116 Accrued compensation.................................. 1,446 925 Other................................................. 1,624 1,366 ------ ------ $5,609 $4,870 ====== ======
6. CONVERTIBLE SUBORDINATED DEBENTURES In conjunction with the Glycomed merger, the Company adjusted the carrying value of the Glycomed 7 1/2% Convertible Subordinated Debentures due 2003 (the "Debentures") issued by Glycomed in 1992 in the original amount of $50 million to $29.6 million, which was their fair market value at the date of the Merger. The current carrying value approximates fair market value. The Company has entered into a supplemental indenture which provides for conversion of the Debentures into the Company's Common Stock at $26.52 per share. The Debentures pay interest semi-annually at 7.5% per annum and are due in 2003. The difference between the face value and the fair market value at the acquisition date will be accreted up to the face value over the remaining term of the Debentures and the accretion is charged to interest expense. 7. COMMITMENTS Leases and Equipment Notes Payable The Company has entered into capital lease and equipment note payable agreements which require monthly payments through December 2002. The carrying value of equipment under these agreements at December 31, 1997 and 1996 was $16.9 million and $19.0 million, respectively. At December 31, 1997 and 1996, accumulated amortization was $6.0 million and $9.7 million, respectively. The Company has also entered into operating lease agreements for office and research facilities with varying terms through August 2015. The agreements also provide for increases in annual rentals based on changes in the Consumer Price Index or fixed percentage increases varying from three to six percent. One of these leases requires an irrevocable standby letter of credit of $1.3 million to secure the performance of the Company's lease obligations. Rent expense for the years ended December 31, 1997, 1996 and 1995 was $3.4 million, $3.1 million and $2.5 million, respectively. F-11 70 LIGAND PHARMACEUTICALS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 At December 31, 1997, annual minimum rental payments due under the Company's leases and equipment notes payable are as follows (in thousands):
OBLIGATIONS UNDER CAPITAL LEASES AND EQUIPMENT OPERATING NOTES PAYABLE LEASES -------------------- --------- 1998............................................. $ 3,661 $ 3,055 1999............................................. 3,372 2,910 2000............................................. 3,345 2,920 2001............................................. 2,120 2,760 2002............................................. 882 2,813 Thereafter....................................... -- 37,787 ------- ------- Total minimum lease payments..................... 13,380 $52,245 ======= Less amounts representing interest............... 2,126 ------- Present value of minimum lease payments.......... 11,254 Less current portion............................. 2,753 ------- $ 8,501 =======
In 1997, one of the Company's main operating lease agreements for office and research facilities expired, and the Company moved into a second build-to-suit facility. In early 1998, the Company entered into a 17-year lease and the Company loaned the construction partnership $3.7 million which will be repaid with interest over a 10-year period. Royalty Agreements The Company has entered into royalty agreements requiring payments ranging from 1% to 10% of net sales and 10% to 30% of license and other income for certain products developed by the Company. Currently, the Company is making minimum royalty payments under four agreements, which increase annually to a maximum of $285,000 per year and aggregate $1.4 million through 2002. Royalty expense under the agreements for the years ended December 31, 1997, 1996 and 1995 was $276,000, $261,000 and $195,000, respectively. No royalty payments have been received by the Company. 8. STOCKHOLDERS' EQUITY Public Offering In October 1996, the Company completed a secondary public offering of 3,162,500 shares of common stock at a price of $12.00 per share, resulting in net proceeds of approximately $35.3 million. Warrants At December 31, 1997, the Company had outstanding warrants to purchase 6,606,094 shares of the Company's Common Stock, of which 6,497,844 warrants relate to the ALRT transaction (see Note 10). The ALRT warrants have an exercise price of $7.12 per share, the additional warrants have exercise prices ranging from $1.80 to $14.00 per share and expire at various dates through September 30, 2001. F-12 71 LIGAND PHARMACEUTICALS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 Stock Plans The Company's 1992 Stock Option Stock Issuance Plan incorporates all outstanding stock options and unvested share issuances under a prior plan. In May of years 1993 through 1997 inclusive, the plan was amended to increase the aggregate shares available for grant or issuance to 7,303,457 shares of Common Stock. The large majority of the options granted have 10 year terms and vest and become fully exercisable at the end of four years of continued employment. As part of this plan, on the date of the Merger, all outstanding in-the-money stock options from Glycomed's stock option plan were converted into options to purchase 470,008 shares of the Company's Common Stock based on the exchange ratio in effect. The Company's employee stock purchase plan also provides for the sale of up to 206,500 shares of the Company's Common Stock. Pro forma information regarding net loss and loss per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the dates of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1997, 1996 and 1995:
1997 1996 1995 ------------ ------------ ------------ Risk free interest rates......... 6.1% - 6.9% 5.3% - 6.6% 5.7% - 7.6% Dividend yields.................. -- -- -- Volatility....................... 42.7% 44.40% 44.40% Weighted average expected life... 5 or 7 years 5 or 7 years 5 or 7 years
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows (in thousands, except for net loss per share information):
YEARS ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 --------- -------- -------- Net loss as reported...................... $(100,150) $(37,313) $(64,172) Net loss pro forma........................ (102,929) (39,210) (65,082) Net loss per share as reported............ (3.02) (1.30) (2.70) Net loss per share pro forma.............. (3.11) (1.36) (2.74)
The pro forma effect on net loss for 1997, 1996 and 1995 is not representative of the pro forma effect on net loss in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. F-13 72 LIGAND PHARMACEUTICALS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 Following is a summary of the Company's stock option plans activity and related information:
WEIGHTED AVERAGE SHARES PRICE RANGE EXERCISE PRICE --------- -------------- -------------- Balance at December 31, 1994.......... 2,418,904 $ .22 - 11.59 $ 8.75 Merger options granted.............. 470,008 .68 - 6.37 3.37 Granted............................. 1,077,540 4.68 - 10.00 7.36 Exercised........................... (215,530) .29 - 7.97 4.10 Cancelled........................... (146,816) 3.89 - 11.59 7.57 --------- -------------- ------ Balance at December 31, 1995.......... 3,604,106 .29 - 11.59 7.33 Granted............................. 974,015 10.31 - 16.38 12.85 Exercised........................... (498,456) .22 - 12.75 5.61 Cancelled........................... (282,783) 3.89 - 13.31 7.91 --------- -------------- ------ Balance at December 31, 1996.......... 3,796,882 .22 - 16.38 9.55 Granted............................. 875,339 9.50 - 16.06 12.75 Exercised........................... (384,340) .68 - 14.50 8.59 Cancelled........................... (219,375) 5.50 - 16.06 10.65 --------- -------------- ------ Balance at December 31, 1997.......... 4,068,506 $ .68 - 16.06 $10.26 ========= ============== ====== Options exercisable at December 31, 1997................... 2,442,187 $ .68 - 16.06 ========= ==============
Of the total options granted from 1995 through 1997, 3,338,890 were granted at a price equal to the fair value of the options at the time of grant, and 58,012 were granted at a price below the fair value of the options at the time of grant. Following is a further breakdown of the options outstanding as of December 31, 1997:
WEIGHTED AVERAGE OPTIONS REMAINING LIFE WEIGHTED AVERAGE RANGE OF EXERCISE PRICES OUTSTANDING IN YEARS EXERCISE PRICE - ------------------------ ----------- ---------------- ---------------- $ 0.68 - $ 0.79 15,287 2.24 $ 0.73 $ 3.89 - $ 4.60 27,962 6.77 $ 4.06 $ 4.68 - $ 9.10 1,594,638 6.55 $ 7.78 $ 9.21 - $12.13 1,604,174 7.56 $10.96 $12.75 - $16.38 826,445 8.91 $14.03 --------- ------ 4,068,506 $10.26 ========= ======
At December 31, 1997, 642,246 shares were available under the plans for future grants of stock options or sale of stock. For certain shares issued under these plans and certain other issuances of stock, the Company has recognized as compensation and consulting expense the excess of the deemed value for accounting purposes over the aggregate issue price for such shares. The compensation expense is amortized ratably over the vesting period of each share. Amortization of deferred compensation and consulting for the years ended December 31, 1997, 1996 and 1995 was $322,000, $497,000 and $711,000, respectively. F-14 73 LIGAND PHARMACEUTICALS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 Shareholder Rights Plan In September 1996, the Company's Board of Directors adopted a preferred shareholder rights plan (the "Shareholder Rights Plan") which provides for a dividend distribution of one preferred share purchase right (a "Right") on each outstanding share of the common stock. Each Right entitles stockholders to buy 1/1000(th) of a share of Ligand Series A Participating Preferred Stock at an exercise price of $100, subject to adjustment. The Rights will become exercisable following the tenth day after a person or group announces an acquisition of 20% or more of the Common Stock, or announces commencement of a tender offer, the consummation of which would result in ownership by the person or group of 20% or more of the Common Stock. The Company will be entitled to redeem the Rights at $0.01 per Right at any time on or before the earlier of the tenth day following acquisition by a person or group of 20% or more of the common stock and September 13, 2006. 9. COLLABORATIVE RESEARCH AGREEMENTS Eli Lilly and Company In November 1997, the Company entered into a strategic alliance with Eli Lilly and Company ("Lilly") for the discovery and development of products based on Ligand's Intracellular Receptor technology. Lilly made an investment of $37.5 million by purchasing 2,176,279 shares of the Company's Common Stock at $17.23 per share at the inception of the agreement. The price per share included a 20% premium to the market value as defined in the agreement. The 20% premium was in recognition of Ligand's past research and development efforts and accordingly, $6.25 million (the premium) was included in 1997 revenues. Ligand also received a $12.5 million up-front non-refundable milestone payment following inception of the agreement. Under the agreement, Lilly also agreed to support up to $49 million in research funding. Revenues for research funding are recognized ratably over the term of the agreement. Revenues recognized for the year ended December 31, 1997 were $19.7 million. The Company also has the option to obtain selected rights to one Lilly specialty pharmaceutical product. Should the Company elect to obtain selected rights to the product, Lilly could receive milestone payments of up to $20 million payable in the Company's Common Stock. In the event that Ligand does not exercise this product option during the first 120 days after the effective date of the agreements, the Company will sell an additional $20 million in equity to Lilly at a 20% premium to the then current market price, and the Company will qualify for certain additional royalties of up to 1.5% on net sales of the Company's choice of Targetin (LGD1069), LGD1268 or LGD1324. SmithKline Beecham Corporation In February 1995, the Company entered into a research collaboration with SmithKline Beecham Corporation ("SmithKline Beecham") to discover and characterize small molecule drugs to control hematopoiesis. Revenues under the agreement are recognized ratably over the term of the agreement. Revenues recognized under the agreement for the years ended December 31, 1997, 1996 and 1995 were $3.2 million, $2.4 million and $2.1 million, respectively. SmithKline Beecham has agreed to provide the Company up to $21.5 million in research funding and equity investments. SmithKline Beecham made an investment of $5.0 million by purchasing 674,127 shares of the Company's Common Stock at $7.41 per share at the inception of the agreement. In November 1995, a second equity investment of $2.5 million by purchasing 260,200 shares of the Company's Common Stock at $9.60 per share, was provided to the Company upon the achievement of certain milestones. In January 1997, a third installment of equity investment of $2.5 million by purchasing 164,474 shares of the Company's Common Stock at $15.20 per share was provided to the Company as a result of SmithKline Beecham's election to expand the scope of research as defined. The final installment of $2.5 million was provided in October 1997 as a convertible note as a result of SmithKline Beecham's election to extend the collaboration. The note is convertible into the Company's Common Stock at $13.56 per share F-15 74 LIGAND PHARMACEUTICALS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 and is due October 002 unless converted into the Company's Common Stock earlier. The interest rate on the note is payable semi-annually at prime. American Home Products Corporation In September 1994, the Company entered into a collaborative research agreement with Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products ("AHP"), to discover and develop drugs which interact with the estrogen or progesterone receptors. AHP agreed to provide up to $19.0 million of the Company's research activities, to invest $5.0 million by purchasing 574,513 shares of the Company's Common Stock at $8.70 per share, and to provide, in three installments, up to $20.0 million in convertible notes over the life of the agreement. In January 1996, the Company and AHP expanded and amended the research and development collaboration. The Company received $1.5 million in additional research revenue from AHP, AHP expanded the research funding by $1.0 million in years two and three of the agreement, the contract-specified milestone payments increased, AHP granted rights to the Company to cause the conversion of the convertible note into Common Stock, and the parties agreed to extend the period for Ligand to draw down the second convertible note installment until December 1996. Revenues under the agreement are recognized ratably over the term of the agreement. Revenues recognized under the agreement for the years ended December 31, 1997, 1996 and 1995 were $4.0 million, $6.9 million and $4.0 million, respectively. The $5.0 million equity investment plus the initial $10.0 million convertible note was provided to the Company upon inception of the agreement. In the second quarter of 1995, the Company achieved certain milestones which qualified the Company to receive the second installment of a $5.0 million convertible note, which the Company elected to receive in December 1996. The final convertible note installment of $5.0 million will be provided if the collaboration agreement is extended from three to five years. The first two notes are convertible into the Company's Common Stock at $10.01 per share and the final note is convertible at $10.88 per share. The conversion prices are subject to adjustment if certain dilutive events occur to the Company's outstanding Common Stock. In August 1996, March 1997, July 1997 and again in December 1997, the Company converted $3.8 million, $3.8 million, $2.5 million and $1.3 million of the convertible notes outstanding into 374,626, 374,626, 249,749 and 124,875 shares of Common Stock, at the $10.01 conversion price. The notes bear interest at 7.75% payable semi-annually and are due September 1999 unless converted into the Company's Common Stock. If conversion has not occurred by September 1999, the Company may extend the due date of the notes to September 2001. Abbott Laboratories In July 1994 the Company entered into a long-term collaborative research agreement with Abbott Laboratories ("Abbott") to discover and develop drugs for the prevention or treatment of inflammatory diseases. Abbott agreed to support up to $16.0 million of the Company's research activities over a five-year period in connection with the agreement. Revenues under the agreement are recognized ratably over the term of the agreement and for the years ended December 31, 1997, 1996 and 1995 revenues were $1.7 million, $2.5 million and $2.6 million, respectively. Abbott made an equity investment of $5.0 million by purchasing 571,305 shares of the Company's Common Stock at $8.75 per share at the inception of the agreement, and in August 1995 Abbott made another equity investment of $5.0 million by purchasing 516,129 shares of the Company's Common Stock at $9.68 per share, as provided in the contract. F-16 75 LIGAND PHARMACEUTICALS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 Sankyo Company, Limited As part of the Glycomed acquisition, the Company acquired a collaborative research agreement with Sankyo Company, Limited ("Sankyo") which Glycomed had entered into in June 1994. Under the agreement, Sankyo reimburses a portion of the Company's research expenses related to the collaboration up to an aggregate of $8.9 million. Revenues under the agreement are recognized ratably over the term of the agreement. Revenues recognized under the agreement and for the years ended December 31, 1997 and 1996, and since the date of Merger through December 31, 1995 were $2.3 million, $2.7 million and $1.7 million, respectively. The agreement also provides that upon being presented with a target compound arising from the research collaboration by the Company, Sankyo shall notify the Company whether it wishes to pursue development of the compound. If Sankyo exercises its option to develop the compound, the Company and Sankyo shall negotiate in good faith the terms and conditions for an option and license agreement within 180 days of Sankyo's exercise. Sankyo shall pay the Company an initial payment of $1.0 million within 30 days after execution of each option and license agreement as a license fee. Sankyo shall make additional payments of license fees as follows: $1.0 million within 30 days after Sankyo decides to initiate Phase II clinical trials of the approved compound in Japan; $1.0 million within 30 days after the filing of an NDA for the approved compound in Japan; and $2.0 million within 30 days after the date of approval of an NDA for the approved compound in Japan. In connection with the collaborative research agreement, in September 1995, Sankyo purchased 189,274 shares of the Company's Common Stock at $7.92 per share for net proceeds of $1.5 million. In June 1997, the collaborative research agreement was extended through October 1997. No further extension of the research agreement is anticipated. Glaxo-Wellcome plc In September 1992 the Company entered into a five-year collaborative research agreement with Glaxo-Wellcome plc ("Glaxo") to develop drugs for the treatment of cardiovascular disease. Under the agreement, Glaxo reimburses a portion of the Company's research expenses related to the collaboration to a maximum of approximately $2.0 million annually. Revenues under the agreement are recognized ratably over the term of the agreement. Revenues recognized under the agreement for the years ended December 31, 1997, 1996 and 1995 were $1.3 million, $2.1 million and $2.1 million, respectively. In connection with the agreement, Glaxo purchased 662,755 shares of the Company's Common Stock at $11.31 per share for net proceeds of $7.5 million. Glaxo also purchased 315,465 shares of the Company's Common Stock at $7.92 per share as part of the Company's initial public offering for net proceeds of $2.5 million. Pfizer Inc. In 1991, the Company entered into a collaborative research and development and license agreement with Pfizer Inc. ("Pfizer") to perform services related to the joint development of pharmaceuticals for the treatment of osteoporosis. Due to the early success in meeting research-stage objectives for drug candidates, the two companies phased out the ongoing research collaboration by July 1, 1994. In connection with the collaborative research agreement, Pfizer purchased 1,353,125 shares of the Company's Common Stock for $5.54 per share for net proceeds of $7.5 million. In December 1994, the Company filed suit against Pfizer in the Superior Court of California in San Diego County for breach of contract and for a declaration of future rights as they relate to droloxifene, a compound upon which the Company performed work at Pfizer's request during a collaboration between Pfizer and the Company to develop drugs in the field of osteoporosis. Droloxifene is an estrogen antagonist/partial agonist with potential indications in the treatment of osteoporosis and breast cancer as well as other applications. The F-17 76 LIGAND PHARMACEUTICALS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 Company and Pfizer entered into a settlement agreement with respect to the lawsuit in April 1996. Under the terms of the settlement agreement, the Company is entitled to receive milestone payments if Pfizer continues development and royalties if Pfizer commercializes droloxifene. At the option of either party, milestone and royalty payments owed the Company can be satisfied by Pfizer transferring to the Company shares of Common Stock at an exchange ratio of $12.375 per share. To date, the Company has received approximately $1.3 million in milestone payments from Pfizer as a result of the continued development of droloxifene. These milestones were paid in the form of an aggregate of 101,011 shares of Common Stock, which were subsequently retired from treasury stock in September 1996. According to recent announcements by Pfizer, droloxifene has entered Phase II/III clinical trials for osteoporosis. 10. ALLERGAN LIGAND RETINOID THERAPEUTICS , INC. - RELATED PARTY In December 1994, the Company and Allergan, Inc. ("Allergan") formed Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT") to continue the research and development activities previously conducted by Allergan-Ligand Joint Venture ("the Joint Venture"). In June 1995, the Company and ALRT completed a public offering of 3,250,000 units (the "Units") with aggregate proceeds of $32.5 million (the "ALRT Offering") and cash contributions by Allergan and Ligand of $50.0 million and $17.5 million, respectively, providing for net proceeds of $94.3 million for retinoid product research and development. Ligand's $17.5 million in cash contribution, as well as warrants were in exchange for (i) a right to acquire all of the Callable Common Stock at specified future dates and amounts and (ii) a right to acquire all rights to the Panretin (ALRT 1057) product, jointly with Allergan. Allergan's $50.0 million cash contribution to ALRT was in exchange for (i) the right to acquire one-half of technologies and other assets in the event Ligand exercises its right to acquire all of the Callable Common Stock, (ii) a similar right to acquire all of the Callable Common Stock if Ligand does not exercise its right and (iii) a right to acquire all rights to the Panretin (ALRT1057) product, jointly with Ligand. Each Unit consisted of one share of ALRT's callable common stock and two warrants, each warrant entitling the holder to purchase one share of the Company's Common Stock. Immediately prior to the consummation of the ALRT Offering, Allergan Pharmaceuticals (Ireland) Ltd., Inc. made a $6.0 million investment by purchasing 994,819 shares of the Company's Common Stock at $6.03 per share. The Company's $17.5 million cash contribution resulted in a one-time charge to operations. The Company also recorded a warrant subscription receivable and corresponding increase in paid-in capital of $5.9 million (6,500,000 warrants valued at $.90 per warrant) pursuant to the ALRT Offering. From June 3, 1995 through September 23, 1997, cash received from ALRT pursuant to a Research and Development Agreement was prorated between contract revenue and the warrant subscription receivable based on their respective values. In 1997, 1996 and 1995, $1.5 million, $2.1 million and $1.3 million, respectively, of the proceeds received from ALRT were applied to the warrant subscription receivable. In conjunction with the consummation of the ALRT Offering, all rights held by the Joint Venture were licensed to ALRT. In September 1997, the Company and Allergan exercised their respective options to purchase the Callable Common Stock (the "Stock Purchase Option") and certain assets (the "Asset Purchase Option") of ALRT. The Company's exercise of the Stock Purchase Option required the issuance of 3,166,567 shares of the Company's Common Stock along with cash payments totaling $25.0 million to holders of the Callable Common Stock in November 1997. Allergan's exercise of the Asset Purchase Option required a cash payment of $8.9 million which was used by the Company to pay a portion of the Stock Purchase Option. In November 1997, ALRT became a wholly owned subsidiary of the Company. The transaction was accounted for using the purchase method of accounting. The excess of the purchase price over the fair value of F-18 77 LIGAND PHARMACEUTICALS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 the net assets acquired was allocated to in-process technology and was written off, resulting in a one-time non-cash charge to results of operations of $65.0 million. Details of the acquisition are as follows (in thousands): Total consideration: Common stock.............................................. $52,595 Liabilities assumed....................................... 1,010 Warrant subscription receivable write-off................. 918 Net cash paid for ALRT net of cash received............... 12,661 ------- $67,184 ======= Less: Deferred liabilities write-off.............................. $ 2,214 Write-off of in-process technology.......................... 64,970 ------- $67,184 =======
The following unaudited pro forma data reflects the Company's 1997 and 1996 results of operations as if the ALRT acquisition occurred on January 1, 1996 (in thousands, except per share data):
1997 1996 ------- ------- Revenues.................................................. $32,702 $18,201 Net loss.................................................. (54,177) (83,286) Loss per share............................................ (1.64) (2.89)
11. LICENSE AGREEMENT In September 1992, the Company acquired certain licenses and technology rights from Rockefeller University and New York University in exchange for an initial cash payment, shares of Common Stock and warrants to purchase Common Stock of the Company. Under the terms of the agreements, the Company acquired worldwide licensing rights to certain transcription technology developed by Rockefeller University. The agreements also provide for certain additional payments if certain milestones are achieved. In connection with these agreements, the Company entered into consulting agreements whereby two scientists received shares of Common Stock from the Company's restricted stock plan. These shares were issued at par value and resulted in deferred consulting of $2.2 million which were recognized over the five-year vesting period. 12. NOTES RECEIVABLE FROM OFFICERS AND EMPLOYEES The Company has advanced funds to certain officers and employees in connection with various employment agreements. The agreements provide for forgiveness of the advances over four-year and five-year periods. If an individual terminates the relationship with the Company, the unforgiven portion of the advances and any accrued interest are due and payable upon termination. The notes are secured by shares of the Company's Common Stock owned by the individual or second trust deeds on the personal residences of the respective employees. F-19 78 LIGAND PHARMACEUTICALS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 13. INCOME TAXES At December 31, 1997, the Company had consolidated federal and combined California income tax net operating loss carryforwards of approximately $226 million and $36 million, respectively. The difference between the federal and California tax loss carryforwards is primarily attributable to the capitalization of research and development expenses for California income tax purposes and the 50% limitation on California loss carryforwards. The federal tax loss carryforward will begin to expire in 2002, unless previously utilized. The California tax loss carryforwards began expiring in 1997 (approximately $1,087,000 expired in 1997). The Company also had consolidated federal and combined California research tax credit carryforwards of approximately $8 million and $3.1 million respectively, which will begin to expire in 2002 unless previously utilized. Pursuant to Internal Revenue Code Sections 382 and 383, use of a portion of net operating loss and credit carryforwards will be limited because of cumulative changes in ownership of more than 50% which occurred within three year periods during 1989, 1992 and 1996. However, the Company does not believe the limitations will have a material impact upon the future utilization of these carryforwards. In addition, use of Glycomed's preacquisition tax net operating and credit carryforwards will also be limited because the acquisition by the Company represents a change in ownership of more than 50%. Such tax net operating losses and credit carryforwards have been reduced, including the related deferred tax assets. Significant components of the Company's deferred tax assets as of December 31, 1997 and 1996 are shown below (in thousands). A valuation allowance has been recognized to fully offset the deferred tax assets as of December 31, 1997 and 1996 as realization of such assets is uncertain.
1996 1997 --------- -------- Deferred tax liability: Acquired subordinated debt.......................... $ 5,483 $ 6,579 Deferred tax assets: Net operating loss carryforwards.................... 82,552 62,615 Research and development credits.................... 9,979 8,260 Capitalized research and development................ 10,252 8,655 Other -- net........................................ 3,472 5,100 --------- -------- Total deferred tax assets............................. 111,738 84,630 Valuation allowance for deferred tax assets........... (106,255) (78,051) --------- -------- Net deferred tax assets............................... 5,483 6,579 --------- -------- Net deferred taxes.................................... $ -- $ -- ========= ========
Approximately $1.9 million of the valuation allowance for deferred tax assets relates to benefits of stock option deductions which, when recognized, will be allocated directly to paid-in capital. F-20 EX-10.165 2 EXHIBIT 10.165 1 EXHIBIT 10.165 AMENDED AND RESTATED TECHNOLOGY CROSS LICENSE AGREEMENT AMONG ALLERGAN, INC., LIGAND PHARMACEUTICALS INCORPORATED AND ALLERGAN LIGAND RETINOID THERAPEUTICS, INC. SEPTEMBER 24, 1997 2 TABLE OF CONTENTS
Page 1. Definitions........................................................... 1 1.1 "Affiliate"................................................... 1 1.2 "Allergan".................................................... 2 1.3 "Allergan Selected Compounds"................................. 2 1.4 "Allergan Technology"......................................... 2 1.5 "ALRT"........................................................ 2 1.6 "Asset Purchase Option"....................................... 2 1.7 "Bankruptcy Code"............................................. 2 1.8 "Business Day"................................................ 2 1.9 "Cancer Indications".......................................... 2 1.10 "Change of Control"........................................... 2 1.11 "Closing Date"................................................ 3 1.12 "Commercialization"........................................... 3 1.13 "Compound 168"................................................ 3 1.14 "Compound 168 Products"....................................... 3 1.15 "Compound 268"................................................ 3 1.16 "Compound 268 Product"........................................ 3 1.17 "Compound 324"................................................ 3 1.18 "Compound 324 Product"........................................ 3 1.19 "Compound 1057"............................................... 3 1.20 "Compound 1057 Product"....................................... 3 1.21 "Compound 1069"............................................... 3 1.22 "Compound 1069 Product"....................................... 3 1.23 "Control" or "Controlled"..................................... 4 1.24 "Corporate Partnering Transaction"............................ 4 1.25 "Co-Transfection Assay"....................................... 4 1.26 "Development"................................................. 4 1.27 "Drug Approval Application"................................... 4 1.28 "Effective Date".............................................. 4 1.29 "Eye or Skin Indications"..................................... 4 1.30 "FDA"......................................................... 4 1.31 "Field"....................................................... 4 1.32 "Force Majeure"............................................... 4 1.33 "IND"......................................................... 5 1.34 "Information"................................................. 5 1.35 "Joint Agreements"............................................ 5 1.36 "Know-how".................................................... 5 1.37 "Ligand"...................................................... 5 1.38 "Ligand Selected Compounds"................................... 5 1.39 "Ligand Technology"........................................... 5
3 TABLE OF CONTENTS (Continued)
Page 1.40 "Net Sales".................................................. 6 1.41 "Non-Retinoid Technology".................................... 7 1.42 "North America".............................................. 7 1.43 "Party"...................................................... 7 1.44 "Patent"..................................................... 7 1.45 "Patent Application"......................................... 7 1.46 "Patent Costs"............................................... 7 1.47 "Patent Rights".............................................. 7 1.48 "Person"..................................................... 7 1.49 "Program Agreements"......................................... 8 1.50 "Program Compound"........................................... 8 1.51 "Program Product"............................................ 8 1.52 "Program Technology"......................................... 8 1.53 "Regulatory Approval"........................................ 9 1.54 "Regulatory Authority" ...................................... 9 1.55 "Research"................................................... 9 1.56 "Retinoid"................................................... 9 1.57 "Royalty Term"............................................... 9 1.58 "Selected Compounds"......................................... 9 1.59 "Stock Purchase Option"...................................... 9 1.60 "Territory".................................................. 9 1.61 "Third Party"................................................ 9 1.62 "Third Party Royalties"...................................... 10 1.63 "Transition Plan"............................................ 10 1.64 "Unsynthesized Compound"..................................... 10 2. Grant Of Licenses.................................................... 10 2.1 Allergan's Licenses to Ligand................................ 10 2.2 Licenses to Allergan......................................... 11 2.3 Licenses Back to use Compounds as Intermediates.............. 11 2.4 Cross-License of Non-Retinoid Technology..................... 12 2.5 Licensed Rights Restrictions................................. 12 2.6 Obligations to Other Parties................................. 12 2.7 No Implied Licenses.......................................... 12 3. Selection of Program Compounds....................................... 12 3.1 List of Compounds; Exchange of Information................... 13 3.2 Lottery Procedure............................................ 14 3.3 Selected Compounds........................................... 15
-ii- 4 TABLE OF CONTENTS (Continued)
Page 4. Fee.................................................................. 15 5. Royalty Payments..................................................... 15 5.1 Royalty Payments to Allergan.................................. 15 5.2 Royalty Payments to Ligand.................................... 16 6. Milestone Payments................................................... 16 7. Payment; Records; Audits............................................. 17 7.1 Payment; Reports.............................................. 17 7.2 Exchange Rate; Manner and Place of Payment.................... 17 7.3 Records and Audits............................................ 17 7.4 Combination Products.......................................... 19 7.5 Withholding of Taxes.......................................... 19 7.6 Prohibited Payments........................................... 19 8. Representations, Warranties And Covenants............................ 19 8.1 Representations, Warranties and Covenants by the Parties...... 19 8.2 Program Technology............................................ 20 8.3 Representations, Warranties and Covenants by Ligand........... 21 8.4 Non-Solicitation of Employees................................. 22 8.5 Corporate Partnering Restrictions............................. 22 9. Disclosure And Use Of Technology And Rights.......................... 22 9.1 Patent Prosecution............................................ 22 9.2 Infringement.................................................. 23 9.3 Cooperation................................................... 24 10. Confidentiality...................................................... 24 10.1 Obligation of Non-Disclosure.................................. 24 10.2 Permitted Disclosures......................................... 25 10.3 Publications.................................................. 25 10.4 Publicity Review.............................................. 25 10.5 Survival...................................................... 26
-iii- 5 TABLE OF CONTENTS (Continued)
Page 11. Disclaimer Of Warranty; Consequential Damages........................ 26 11.1 Disclaimer of Warranty....................................... 26 11.2 Consequential Damages........................................ 26 12. Indemnification...................................................... 26 12.1 Indemnification by Allergan................................... 26 12.2 Indemnification by Ligand..................................... 26 12.3 Notices; Participation........................................ 27 12.4 Survival...................................................... 27 13. Term And Termination................................................. 27 13.1 Term.......................................................... 27 13.2 Termination by Mutual Agreement............................... 27 13.3 Rights in Bankruptcy.......................................... 27 13.4 No Termination for Breach..................................... 27 14. Miscellaneous........................................................ 28 14.1 Retained Rights............................................... 28 14.2 Force Majeure................................................. 28 14.3 Further Actions............................................... 28 14.4 No Trademark Rights........................................... 28 14.5 Notices....................................................... 29 14.6 Governing Law................................................. 29 14.7 Waiver........................................................ 29 14.8 Severability.................................................. 29 14.9 Headings; Ambiguities......................................... 30 14.10 Entire Agreement; Amendment................................... 30 14.11 Mutual Releases............................................... 30 14.12 Relationship of the Parties................................... 30 14.13 Successors and Assigns........................................ 30 14.14 Counterparts.................................................. 30 14.15 Dispute Resolution............................................ 30
-iv- 6 AMENDED AND RESTATED TECHNOLOGY CROSS LICENSE AGREEMENT This AMENDED AND RESTATED TECHNOLOGY CROSS LICENSE AGREEMENT ("Agreement") is entered into as of the 24th day of September, 1997 among ALLERGAN, INC., a Delaware corporation having offices at 2525 Dupont Drive, Irvine, California 92715-1599 ("Allergan"), LIGAND PHARMACEUTICALS INCORPORATED, a Delaware corporation having offices at 9393 Towne Centre Drive, San Diego, California 92121 ("Ligand"), and, subject to Section 14.14 hereof, ALLERGAN LIGAND RETINOID THERAPEUTICS, INC., a Delaware corporation having offices at 9393 Towne Centre Drive, San Diego, California 92121 ("ALRT"). A. (i) Allergan, Ligand and ALRT are Parties to the Program Agreements, (ii) Allergan and Ligand have entered into the Joint Agreements between themselves, (iii) pursuant to the Stock Purchase Option, Ligand will deliver, within two (2) business days, irrevocable notice of its election to acquire all of the outstanding Callable Common Stock of ALRT in accordance with the terms of the Stock Purchase Option pursuant to the Ligand exercise notice in the form attached hereto as Exhibit A and (iv) pursuant to the Asset Purchase Option, Allergan will deliver, within two (2) business days, notice of its election to acquire from ALRT the Purchased Assets (as defined in Section 1.1 of that certain Asset Purchase Option Agreement dated June 3, 1995 among Allergan, Ligand and ALRT) in accordance with the terms of the Asset Purchase Option pursuant to the Allergan exercise notice in the form attached hereto as Exhibit B. B. The Parties have entered into a Transition Agreement concurrently herewith providing for, among other things, the transition upon the Effective Date of research and development being conducted with respect to Selected Compounds by ALRT. C. On or prior to the date hereof, Ligand has, or within two (2) days following the date hereof Ligand will have, prepared and filed with the Securities and Exchange Commission ("SEC") a Registration Statement with respect to the issuance of any shares of Ligand Common Stock being issued in payment of the Stock Purchase Option Exercise Price in accordance with Sections 5.3 and 5.6 of ALRT's Amended and Restated Certificate of Incorporation. D. The Parties desire to enter into this Agreement to provide for the grant of certain technology licenses on the terms specified herein, and Allergan and Ligand desire to supersede by this Agreement all of the terms and provisions of the Joint Agreements. NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Allergan, Ligand and ALRT hereby agree as follows: 1. DEFINITIONS. All capitalized terms used herein shall have the following meanings: 1.1 "AFFILIATE" shall mean any entity that directly or indirectly Owns, is Owned by, or is under common Ownership, with a Party, where "Owns" or "Ownership" means direct or 7 indirect possession and/or control of at least 50% of the outstanding voting securities of a corporation or a comparable equity interest in any other type of entity. 1.2 "ALLERGAN" shall mean Allergan, Inc., a Delaware corporation. 1.3 "ALLERGAN SELECTED COMPOUNDS" shall mean the Program Compounds set forth on Exhibit G attached hereto as of the date hereof and each of the Program Compounds added to such Exhibit G in accordance with Section 3. 1.4 "ALLERGAN TECHNOLOGY" shall mean all rights to Program Technology acquired by Allergan pursuant to the exercise of the Asset Purchase Option. Notwithstanding the foregoing, for purposes of this Agreement, in no event shall "Allergan Technology" include (A) Compound 168 or Compound 168 Products or any rights to Compound 168 or Compound 168 Products or the making and/or using of Compound 168 or Compound 168 Products for any purpose or (B) any test data including pharmacological and clinical test data, analytical and quality control data, manufacturing, marketing and sales data and drug distribution data created, developed, learned or reduced to practice in the course of researching, developing and/or commercializing Compound 168 or Compound 168 Products. 1.5 "ALRT" shall mean Allergan Ligand Retinoid Therapeutics, Inc., a Delaware corporation. 1.6 "ASSET PURCHASE OPTION" shall have the meaning assigned in Section 1.1 of that certain Asset Purchase Option Agreement dated as of June 3, 1995 among Allergan, Ligand and ALRT. 1.7 "BANKRUPTCY CODE" shall mean Title 11 of the United States Code, as amended from time to time. 1.8 "BUSINESS DAY" shall mean any day, excluding Saturday, Sunday and any other day on which banking institutions in San Diego, California are authorized or required by law, regulation or executive order to be closed. 1.9 "CANCER INDICATIONS" shall mean the treatment, palliation or prevention (including chemoprevention) of *** *** *** *** *** 1.10 "CHANGE OF CONTROL" shall be deemed to have occurred upon the occurrence of any of the following: (i) the sale, lease, transfer or other disposition, in one or a series of transactions, of all or substantially all of a Party's assets (excluding any pledge or hypothecation of assets pursuant to a security agreement in connection with borrowed funds) or (ii) any merger, acquisition, consolidation, reorganization or other transaction or series of transactions pursuant *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -2- 8 to which the holders of voting securities of a Party immediately prior to such transaction own, immediately thereafter, less than *** of the voting power of the resulting entity. 1.11 "CLOSING DATE" shall mean the date of the last to occur of the closing of (A) Ligand's exercise of the Stock Purchase Option or (B) Allergan's exercise of the Asset Purchase Option, each in accordance with the terms thereof. 1.12 "COMMERCIALIZATION" shall mean the manufacturing, marketing, sale, supply, import, export and distribution of Program Products. 1.13 "COMPOUND 168" shall mean the compound known as tazarotene (AGN 190168) with the following molecular structure: Ethyl 6 - [2-(4, 4 - Dimethylthiochroman - 6 - yl) -Ethynyl] Nicotinate, and its *** *** 1.14 "COMPOUND 168 PRODUCTS" shall mean products containing Compound 168 that do not contain any other active ingredient that is a Retinoid. 1.15 "COMPOUND 268" shall mean that certain compound designated as LGD 268 with the molecular structure shown in Exhibit C attached hereto, and (i) *** thereof and (ii) if it is a *** *** 1.16 "COMPOUND 268 PRODUCT" shall mean any dosage form of Compound 268 which receives Regulatory Approval for medical uses. 1.17 "COMPOUND 324" shall mean that certain compound designated as LGD 324 with the molecular structure shown in Exhibit D attached hereto, and (i) *** thereof and (ii) if it is a ***. 1.18 "COMPOUND 324 PRODUCT" shall mean any dosage form of Compound 324 which receives Regulatory Approval for medical uses. 1.19 "COMPOUND 1057" shall mean that certain compound designated as LGD 1057 with the molecular structure shown in Exhibit E attached hereto, and (i) *** thereof and (ii) if it is a *** *** 1.20 "COMPOUND 1057 PRODUCT" shall mean any dosage form of Compound 1057 which receives Regulatory Approval for medical uses. 1.21 "COMPOUND 1069" shall mean that certain compound designated as LGD 1069 with the molecular structure shown in Exhibit F attached hereto, and its *** thereof. 1.22 "COMPOUND 1069 PRODUCT" shall mean any dosage form of Compound 1069 which receives Regulatory Approval for medical uses. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -3- 9 1.23 "CONTROL" OR "CONTROLLED" means possession of the ability to grant a license or sublicense as provided for herein. 1.24 "CORPORATE PARTNERING TRANSACTION" shall mean any transaction involving the assignment, licensing or sublicensing or any other transfer of any Program Technology, Allergan Technology or Ligand Technology or the research, development and/or commercialization of any Program Compounds, with one or more Third Parties; provided, however, that Corporate Partnering Transactions shall exclude any transaction or series of related transactions (i) which are solely financing transactions (for example, "special purpose corporation," "SWORD" or similar transactions) or (ii) which constitute a Change of Control of Allergan, Ligand or ALRT, as applicable. 1.25 "CO-TRANSFECTION ASSAY" shall mean the assay generally described in the U.S. Patents Nos. 5,071,773 and 4,981,784 and biological materials useful with such assay generally described in the U.S. Patents Nos. 5,298,429, 5,597,693, 5,171,671, 5,599,904, 5,091,518 and 5,534,418, and shall include all Ligand Technology useful in the practice of the assay described in such Patents. 1.26 "DEVELOPMENT" shall mean those activities undertaken in the Field following the filing (and approval) of an IND devoted to the exploration of Program Compounds in human clinical trials and/or the conduct of any other studies (including pre-clinical studies - in vitro and animal) subsequent to the filing of an IND. 1.27 "DRUG APPROVAL APPLICATION" shall mean an application submitted to a Regulatory Authority for Regulatory Approval to commence commercial sale or use of a product as a drug in a regulatory jurisdiction (e.g., in the United States, a New Drug Application, a Product License Application or an Abbreviated New Drug Application, but not an IND). 1.28 "EFFECTIVE DATE" shall mean the Closing Date. 1.29 "EYE OR SKIN INDICATIONS" shall mean (i) the treatment, palliation, or prevention of diseases, disorders, irritations or conditions of the eyes or the skin and (ii) the treatment, palliation or prevention of any *** *** *** 1.30 "FDA" means the United States Food and Drug Administration. 1.31 "FIELD" shall mean Retinoids, together with the receptors to which such compounds bind, for any use in humans or animals, excluding any rights to and the making, using, importing and/or selling of Compound 168 and/or Compound 1069. 1.32 "FORCE MAJEURE" shall mean any act of God, any accident, explosion, fire, storm, earthquake, flood, drought, peril of the sea, riot, embargo, war or foreign, federal, state or municipal law, regulation or order of general application, federal governmental action or inaction, seizure, requisition or allocation, any failure or delay of transportation, shortage of or inability *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -4- 10 to obtain supplies, equipment, fuel or labor or any other circumstances or event beyond the reasonable control of the Party relying upon such circumstance or event. 1.33 "IND" shall mean an Investigational New Drug Application filed with the FDA, or an equivalent application filed with a foreign Regulatory Authority. 1.34 "INFORMATION" shall mean any and all information as of the Effective Date relating to the Field, including but not limited to techniques, inventions, practices, knowledge, Program Technology, Know-how, skill, experience, test data including pharmacological and clinical test data, analytical and quality control data, manufacturing, marketing and sales data and drug distribution data. 1.35 "JOINT AGREEMENTS" shall mean the Technology Cross License Agreement, the Joint Development Agreement and the Joint Commercialization Agreement, each dated June 3, 1995 between Allergan and Ligand. 1.36 "KNOW-HOW" shall mean any method, procedure, process, assay, composition of matter, device, trade secret, invention, data, technology, Information or other subject matter within the knowledge and possession of Allergan, Ligand or ALRT as of the Effective Date, or developed, learned or conceived by any of them during the course of conducting Research, Development and/or Commercialization pursuant to the Program Agreements, in any form in which any of the foregoing may exist, whether patentable or unpatentable, which contributes in whole or in part to the performance of Research, Development or Commercialization in the Field. 1.37 "LIGAND" shall mean Ligand Pharmaceuticals Incorporated, a Delaware corporation. 1.38 "LIGAND SELECTED COMPOUNDS" shall mean the Program Compounds set forth on Exhibit H attached hereto as of the date hereof and each of the Program Compounds added to such Exhibit H in accordance with Section 3. 1.39 "LIGAND TECHNOLOGY" shall mean all rights to Program Technology acquired by Ligand (directly or indirectly, by reason of the acquisition of all outstanding shares of ALRT Callable Common Stock) pursuant to the exercise of the Stock Purchase Option. Notwithstanding the foregoing, in no event shall "Ligand Technology" include (A) Compound 1069 or Compound 1069 Products or any rights to Compound 1069 or Compound 1069 Products or the making and/or using of Compound 1069 or Compound 1069 Products for any purpose or (B) any test data including pharmacological and clinical test data, analytical and quality control data, manufacturing, marketing and sales data and drug distribution data created, developed, learned or reduced to practice in the course of researching, developing and/or commercializing Compound 1069 or Compound 1069 Products. -5- 11 1.40 "NET SALES" shall have the following meaning: (a) "Net Sales," except as provided in subsection (b) of this Section 1.40, shall mean, with respect to any Program Product, Compound 1069 Product or Allergan or Ligand Exclusive Unsynthesized Compound that is subject to a royalty obligation under the terms of this Agreement, the gross sales invoiced to Third Parties by each of a Party, an Affiliate of a Party and any sublicensee(s) or assignee(s) of such Party or its or any of their direct or indirect sublicensee(s) or assignee(s), or any combination of the foregoing, in any jurisdiction or territory covered by a Regulatory Approval for such Product less the following items, as allocable to such Product: (i) trade discounts, credits or allowances actually allowed and taken (including allowances for bad debts actually taken), (ii) credits or allowances actually granted upon returns, rejections or recalls (except when such recall arises out of the selling Party's gross negligence, willful misconduct or fraud) actually allowed and taken, (iii) freight, shipping and insurance charges, (iv) taxes, duties, or other government tariffs (other than income taxes) and (v) government mandated rebates actually paid. (b) "Net Sales," notwithstanding subsection (a) of this Section 1.40, shall mean, in the circumstance where a Party enters into a license or sublicense with a Third Party with respect to a Program Product or Compound 1069 Product providing for a royalty based upon "net sales" as defined in such license or sublicense, the net sales base actually prescribed in such license or sublicense with the Third Party, including any net sales adjustment for a Combination Product, as defined in Section 7.4 of this Agreement, upon which a royalty is calculated for payment by the Third Party to the licensing Party. (c) The royalty payable to a Party by another Party may be reduced by *** of the royalty which must be paid on sales for the same period of the affected Program Product or Compound 1069 Product to a Third Party; provided, however, that the royalty owed a Party under this Agreement shall in no event be reduced by more than *** *** from the royalty rate otherwise specified in this Agreement. In the circumstance where a Party pays a minimum royalty or pre-paid royalty prior to the sale of a Product or Compound 1069 Product which generates a royalty obligation under this Agreement, that minimum royalty or pre-paid royalty may be credited against royalties owed under this Agreement based on actual invoiced sales; provided that in any given quarter, the royalty owed on actual invoiced sales shall in no event be reduced by more than *** from the royalty rate otherwise specified. (d) Net Sales of Combination Products shall be calculated as provided in Section 7.4. (e) In the circumstance where a Party or its Affiliate makes a sale of a Program Product, Compound 1069 Product or Allergan or Ligand Exclusive Unsynthesized Product upon which a royalty is owed to an Affiliate, and no subsequent sale is intended to a Third Party upon which a royalty would be owed, Net Sales shall be calculated as provided in Subpart (a) of this Section 1.40 except that the invoiced gross sales shall be the greater of (i) the actual invoiced sales to the Affiliate or (ii) a deemed gross sales which is calculated using the average selling price of such product to Third Parties in the same country as such Affiliate during *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -6- 12 the same royalty reporting period or, if no sales to Third Parties in the same country as such Affiliate were made in the same reporting period, using the average selling price during the most recent reporting period in which sales to Third Parties of the Product were made in such country. 1.41 "NON-RETINOID TECHNOLOGY" shall mean all technical information, whether tangible or intangible, outside of the Field, including any and all patent rights, know-how, data, pre-clinical and clinical results, license application materials and all supporting documents, methods, devices, techniques, discoveries, inventions (whether or not patentable), ideas, processes, trade secrets and other proprietary information, including screening technologies and assay systems, and any physical, chemical or biological material and any replication or any part of such material, which Allergan, Ligand or ALRT, either alone or jointly with one or both of the others, conceives, develops, acquires or Controls (under licenses from others or otherwise) using ALRT funding; provided, however, that in no event shall "Non-Retinoid Technology" include (i) Compound 168 and any rights thereto, (ii) Compound 1069 and any rights thereto and (iii) the making and/or using of Compound 168 or Compound 1069 for any purpose. 1.42 "NORTH AMERICA" shall mean the United States of America, its possessions and territories, Canada, Mexico and the Commonwealth of Puerto Rico. 1.43 "PARTY" shall mean Allergan, Ligand or ALRT and their permitted successors and assigns. 1.44 "PATENT" shall mean (i) a patent having claims that cover, and only to the extent they cover, Program Technology, including any extension, registration, confirmation, reissue, renewal or reexamination of such patent and (ii) to the extent rights are granted by a governmental authority thereunder, a Patent Application. 1.45 "PATENT APPLICATION" shall mean an application for a Patent. 1.46 "PATENT COSTS" shall mean the direct fees and expenses incurred after the Effective Date associated with the filing, prosecuting and maintaining of Patents and Patent Applications and direct maintenance expenses incurred in connection with the establishment and direct maintenance of Patent Rights, except as otherwise provided in Section 9 of this Agreement. 1.47 "PATENT RIGHTS" shall mean the rights granted by any governmental authority under those claims of a Patent which cover a method, process, product by-process, composition or material or device, or any improvement thereon, relating to Program Technology, which Patent is owned or Controlled, as of the Effective Date or anytime thereafter, by the Party granting a license herein or an Affiliate of such Party, provided that such Patent issues from a Patent Application (i) that claims an invention made prior to the Closing Date or (ii) which claims priority from, or has an effective filing date of, any Patent Application that claims an invention made prior to the Closing Date disclosing that method, process, product by-process, composition or material or device, or any improvement thereon. 1.48 "PERSON" shall mean any individual, partnership, corporation, firm, association, unincorporated organization, joint venture, trust or other entity. -7- 13 1.49 "PROGRAM AGREEMENTS" shall mean the Technology License Agreement, the Research and Development Agreement, the Commercialization Agreement, the 1057 Purchase Option Agreement and the Asset Purchase Option Agreement, each dated as of June 3, 1995, among Allergan, Ligand and ALRT, and the Stock Purchase Option. 1.50 "PROGRAM COMPOUND" shall mean any compound in the Field chemically synthesized by Allergan, Ligand or ALRT or determined by any of the Parties to have activity in the Field on or prior to the Effective Date, *** *** ***. The term "Program Compound" shall not include (i) Compound 168 or (ii) Compound 1069. 1.51 "PROGRAM PRODUCT" shall mean any dosage form of a Program Compound which receives Regulatory Approval for medical uses. 1.52 "PROGRAM TECHNOLOGY" shall mean, collectively, (i) the intellectual property and other rights in the Field licensed by Allergan, Allergan Retinoid Corporation, Ligand and Ligand JVR, INC. to ALRT pursuant to the Program Agreements, including rights to use the Co-Transfection Assay but only in the Field, (ii) all technical information, whether tangible or intangible, necessary or useful to conduct Research or Development or to make, use, import or sell Program Products in the Field, including any and all Patent Rights, rights in and under Patents and Patent Applications, Know-how, data, routes of synthesis, pre-clinical and clinical results, INDs, Drug Approval Applications, Regulatory Approvals and all supporting documents, techniques, discoveries, inventions (whether or not patentable), ideas, processes, trade secrets and other proprietary information, and any physical, chemical or biological material and any replication or any part of such material and (iii) all test data including pharmacological and clinical test data, analytical and quality control data, manufacturing, marketing and sales data and drug distribution data created, developed, learned or reduced to practice in the course of Researching, Developing and/or Commercializing Program Compounds pursuant to the Program Agreements, in each case that is owned or Controlled by ALRT as of the Effective Date. Program Technology as defined in this Agreement shall include "Program Technology" as defined in Section 1.90 of the Glossary to the Program Agreements. Allergan's right to use the Co-Transfection Assay is limited to use in the Field with the proviso that, in screening for Retinoid compounds using Retinoid receptors or genes encoding for Retinoid receptors, Allergan shall have the right to use the Co-Transfection Assay with other receptors which form heterodimers with Retinoid receptors, but not with other receptors or genes therefor for which Ligand or ALRT acquires a patent (or a license to a patent) to such receptor or gene based on any invention made after the Closing Date. For example, if Ligand obtains a patent claim (or a license to a patent claim) limited to a novel human receptor based on an invention made after the Closing Date, Allergan would be prevented from using such human receptor in the Co-Transfection Assay but would not be prevented from utilizing the Co-Transfection Assay with the corresponding murine receptor. Nothing in this Agreement shall limit Allergan's right to Develop and Commercialize any Retinoid compound identified as a result of the use of the Co-Transfection Assay in accordance with the terms and conditions of this *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -8- 14 Agreement. Program Technology does not include the use of Co-Transfection Assay to screen for non-Retinoid compounds. 1.53 "REGULATORY APPROVAL" shall mean the final approval, license, registration or authorization of any Regulatory Authority, necessary to commence commercial sale or use of a Program Product as a drug in a regulatory jurisdiction. 1.54 "REGULATORY AUTHORITY" shall mean any federal, state, local or foreign regulatory agency, department bureau or other government entity having the authority to grant Regulatory Approval. 1.55 "RESEARCH" shall mean activities undertaken in the Field for identification of lead Retinoid compounds, pharmacology and toxicology testing in preclinical models (in vitro and animal) and chemical scale-up to gather data required to comply with applicable regulations prior to commencement of human clinical trials but excluding Development activities. 1.56 "RETINOID" shall mean any and all compounds included within the metabolic pathways of beta-carotene and other naturally occurring carotenes acting through the retinoid receptors to which such compounds bind and any and all compounds which bind to such receptors, but excluding Compound 168 and Compound 1069. 1.57 "ROYALTY TERM" shall mean, with respect to sales of any product for which a royalty is payable hereunder, the period commencing with the Closing Date and ending on the later of (A) the expiration of the last to expire Patent covering such product or (B) *** following the date of the first commercial sale of such product; provided that in the circumstances where a Party enters into a license or sublicense with a Third Party pursuant to which the Third Party is obligated to make royalty payments to a Party, "Royalty Term," for purposes of this Agreement, shall, with respect to each such license or sublicense, be coincident with the period during which the Third Party has an obligation to make such royalty payments under its agreement with the Party even though such period is shorter or longer than the Royalty Term as otherwise provided herein, but in no event shall such period be less than the longer of (i) *** *** following the date of the first commercial sale of such product or (ii) the expiration of the last to expire Patent covering such product. 1.58 "SELECTED COMPOUNDS" shall mean the Allergan Selected Compounds and the Ligand Selected Compounds. 1.59 "STOCK PURCHASE OPTION" shall mean the Stock Purchase Option provided for pursuant to Article V of the Amended and Restated Certificate of Incorporation of ALRT. 1.60 "TERRITORY" shall mean all countries, nations, states, provinces and territories of the world. 1.61 "THIRD PARTY" shall mean, with respect to Allergan, any Person or entity other than Allergan and its Affiliates and, with respect to Ligand and ALRT, any Person or entity other than Ligand and ALRT and their respective Affiliates. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -9- 15 1.62 "THIRD PARTY ROYALTIES" shall mean royalties payable to a Third Party in respect of the sale of Program Products or Compound 1069 Products. 1.63 "TRANSITION PLAN" shall mean the Transition Agreement of even date herewith among the Parties and referred to in Recital B of this Agreement. 1.64 "UNSYNTHESIZED COMPOUND" shall mean any compound including its individual enantiomers and mixtures of said enantiomers (for example, racemic mixtures of enantiomers) and (i) *** thereof and (ii) if it is a *** in the Field which has not been chemically synthesized by Allergan, Ligand or ALRT *** *** *** The term "Unsynthesized Compound" shall not include (i) Compound 168, (ii) Compound 1069 or (iii) any Program Compound. 2. GRANT OF LICENSES 2.1 ALLERGAN'S LICENSES TO LIGAND. 2.1.1 LIGAND SELECTED COMPOUNDS. Allergan hereby grants to Ligand and ALRT an exclusive, even as to Allergan, fully-paid (except for the royalties provided for in Section 5.1), irrevocable and perpetual worldwide license under the Allergan Technology, with the right to sublicense, to conduct Development and Commercialization with respect to Ligand Selected Compounds, subject to the terms and conditions of this Agreement. 2.1.2 UNSYNTHESIZED COMPOUNDS. Subject to the terms and conditions of this Agreement, Allergan hereby grants to Ligand and ALRT an exclusive, fully-paid (except for the royalties provided for in Section 5.1), irrevocable and perpetual worldwide license under the Allergan Technology, with the right to sublicense, to use the Allergan Technology to conduct development and commercialization in the Field with respect to Unsynthesized Compounds ("Ligand Exclusive Unsynthesized Compounds") *** *** *** ***. Notwithstanding the foregoing, in no event shall Allergan or any Affiliate or sublicensee of Allergan be deemed to have infringed any rights of Ligand or ALRT by reason of any activities conducted by Allergan or such Affiliate or sublicensee pursuant to Section 2.2.2 with respect to any such Unsynthesized Compound prior to or within thirty (30) days after notification to Allergan of such filing and FDA approval. 2.1.3 RESEARCH. Allergan hereby grants to Ligand and ALRT a non-exclusive, fully-paid, irrevocable and perpetual worldwide license under the Allergan Technology, with the right to sublicense, to use the Allergan Technology to conduct Research in the Field using Allergan Selected Compounds, Allergan Exclusive Unsynthesized Compounds and/or Compound 168, subject to the terms and conditions of this Agreement. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -10- 16 2.2 LICENSES TO ALLERGAN. 2.2.1 ALLERGAN SELECTED COMPOUNDS. Ligand and ALRT hereby grant to Allergan exclusive, even as to Ligand and ALRT, fully-paid (except for the royalties provided for in Section 5.2), irrevocable and perpetual, worldwide licenses under the Ligand Technology and the Program Technology, with the right to sublicense, to conduct Development and Commercialization with respect to Allergan Selected Compounds, subject to the terms and conditions of this Agreement. 2.2.2 UNSYNTHESIZED COMPOUNDS. Subject to the terms and conditions of this Agreement, Ligand and ALRT hereby grant to Allergan an exclusive, fully-paid (except for the royalties provided for in Section 5.2), irrevocable and perpetual worldwide license under the Ligand Technology and the Program Technology, with the right to sublicense, to use the Ligand Technology and the Program Technology to conduct development and commercialization in the Field with respect to Unsynthesized Compounds ("Allergan Exclusive Unsynthesized Compounds") *** *** *** *** *** Notwithstanding the foregoing, in no event shall Ligand or any Affiliate or sublicensee of Ligand be deemed to have infringed any rights of Allergan by reason of any activities conducted by Ligand or such Affiliate or sublicensee pursuant to Section 2.1.2 with respect to any such Unsynthesized Compound prior to or within thirty (30) days after notification to Ligand of such filing and FDA approval. 2.2.3 RESEARCH. Ligand and ALRT hereby grant to Allergan non-exclusive, fully-paid, irrevocable and perpetual worldwide licenses under the Ligand Technology, with the right to sublicense, to use the Ligand Technology to conduct Research in the Field using Ligand Selected Compounds, or Ligand Exclusive Unsynthesized Compounds, and/or Compound 1069, subject to the terms and conditions of this Agreement. 2.2.4 PPAR RECEPTORS. Ligand and ALRT hereby grant to Allergan a non- exclusive, fully paid, irrevocable and perpetual worldwide license, with the right to sublicense, to use the PPAR receptors and genes encoding for PPAR receptors (including, but not limited to, the human PPAR gamma receptor), in the Co-Transfection Assay to conduct Research in the Field. This license grant is subject to the terms and conditions of this Agreement and is limited to all technical information relating to PPAR receptors and genes encoding for such receptors, including, but not limited to, any and all patent rights, know-how, data, and inventions (whether or not patentable) conceived, developed acquired or Controlled (under licenses from others or otherwise) by Ligand or ALRT prior to the Closing Date. 2.3 LICENSES BACK TO USE COMPOUNDS AS INTERMEDIATES. 2.3.1 LICENSE TO LIGAND. Allergan hereby grants to Ligand and ALRT a non-exclusive, fully-paid, irrevocable and perpetual worldwide license under the Allergan Technology and the licenses granted to Allergan under Section 2.2, with the right to sublicense, to use Allergan Selected Compounds, Allergan Exclusive Unsynthesized Compounds and Compound 168 *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -11- 17 as intermediates in connection with the manufacture of Ligand Selected Compounds and/or Ligand Exclusive Unsynthesized Compounds, subject to the terms of this Agreement. 2.3.2 LICENSE TO ALLERGAN. Ligand and ALRT hereby grant to Allergan a non-exclusive, fully-paid, irrevocable and perpetual worldwide license under the Ligand Technology, the Program Technology and the licenses granted to Ligand under Section 2.1, with the right to sublicense, to use Ligand Selected Compounds, Ligand Exclusive Unsynthesized Compounds and Compound 1069 as intermediates in connection with the manufacture of Allergan Selected Compounds and/or Allergan Exclusive Unsynthesized Compounds, subject to the terms of this Agreement. 2.4 CROSS-LICENSE OF NON-RETINOID TECHNOLOGY. Allergan, on the one hand, and Ligand and ALRT, on the other, each hereby grants to the other a co-exclusive, with the granting party, royalty-free, irrevocable, perpetual, worldwide license to use the Non-Retinoid Technology for any purpose, including, without limitation, the research, development and commercialization of medical products. The license granted hereunder shall include the right to grant sublicenses. 2.5 LICENSED RIGHTS RESTRICTIONS. None of the Parties, without the prior written approval of all of the other Parties (with Ligand and ALRT treated as one and the same Party for purposes of the foregoing), can grant a license or sublicense, or assign its rights acquired hereunder, to a Third Party which has the effect of retroactively forgiving or licensing conduct of the Third Party which was an infringement of the Patent Rights occurring before grant of such license or sublicense or such assignment. As used in this Section 2.4, the term "Third Party" includes a party who becomes an Affiliate of a Party after September 1, 1997 provided that no such approval shall be required with respect to any such license, sublicense or assignment of rights licensed under Section 2.1.1 or 2.2.1, as applicable. 2.6 OBLIGATIONS TO OTHER PARTIES. Allergan, in the case of use of Program Technology by it and its Affiliates and their licensees and sublicensees, and Ligand and ALRT, in the case of use of Program Technology by them and their Affiliates and their licensees and sublicensees, shall be responsible for obligations to report and pay royalties and milestones which arise from such use under any of the agreements with Third Parties which preexist this Agreement and all of which, to the best of Ligand's knowledge, are listed on Exhibit L attached hereto. 2.7 NO IMPLIED LICENSES. The licenses granted hereunder do not include by implication any license to practice in conjunction therewith intellectual property of a Party not included in Program Technology. 3. SELECTION OF PROGRAM COMPOUNDS. A lottery (the "Lottery") shall be conducted by Allergan and Ligand in accordance with the provisions of this Section 3 for the purpose of equitably dividing between Ligand and ALRT on the one hand and Allergan on the other all Program Compounds existing as of the Closing Date (other than those Program Compounds listed as of the date hereof on Exhibits G and H as Allergan Selected Compounds and Ligand Selected Compounds, respectively) (the "Lottery Compounds"). It is understood and agreed that each -12- 18 Lottery Compound selected shall include such Compound as well as (i) *** thereof and (ii) if it is a *** ***The Lottery Compounds so selected by Allergan and Ligand shall become Allergan Selected Compounds and Ligand Selected Compounds, respectively, and the Parties' respective rights with respect to such Compounds shall be as set forth in this Agreement. 3.1 LIST OF COMPOUNDS; EXCHANGE OF INFORMATION. (a) Continuing through the Closing Date, Allergan and Ligand shall share all information regarding Lottery Compounds which is included within the meaning of Program Technology. Without limiting the foregoing, the Parties shall promptly prepare a database which shall contain the information described in Exhibit J attached hereto. Ligand and Allergan shall each be provided with a copy of such database, and the Parties shall regularly and fully update such database through the Closing Date. (b) Allergan and Ligand have developed a list of Lottery Compounds in existence on the date hereof organized by category, which is attached hereto as Exhibit K. The list of such categories consists of the following: (I) RXR compounds; (II) RAR alpha selective compounds; (III) RAR antagonist compounds; (IV) *** (V) *** (VI) *** (VII) *** Allergan and Ligand shall regularly and fully inform each other of any and all additional Lottery Compounds synthesized by any of the Parties or determined by any of the Parties to have activity in the Field following the preparation of such list and prior to the date that is ten (10) days prior to the mutually agreed upon date of the Lottery, each of which Lottery Compounds shall be added to Exhibit K in the appropriate category. Such list of compounds organized by category shall be finalized ten (10) days prior to the mutually agreed upon date of the Lottery. Ligand's and Allergan's participation in the Lottery will be deemed to constitute its representation and warranty under this Agreement that all Lottery Compounds known to it, and all applicable information relating thereto as aforesaid, have been fully disclosed to the other Party prior to any selection of a Lottery Compound and included in such list as of the Closing Date. Each Party hereby covenants that it will not synthesize any compounds as Program Compounds not already included as Lottery Compounds on Exhibit K following the date that is ten (10) days prior to the mutually agreed upon date of the Lottery. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -13- 19 3.2 LOTTERY PROCEDURE. Prior to the Closing Date and after finalization of the list referred to in Section 3.1 above, the Lottery shall be conducted on a mutually agreed date (in any event not less than ten (10) days prior to the Closing Date). Allergan and Ligand shall conduct the Lottery as follows: (a) Allergan shall initially select two (2) Lottery Compounds from the RXR category (which may be selected at any time prior to the Lottery), followed by Ligand and Allergan alternating selections (with Ligand selecting first) of remaining Lottery Compounds in the RXR category on a single compound for single compound basis, until such time as either (i) there are no Lottery Compounds remaining in the RXR category or (ii) Allergan and Ligand mutually agree to divide the remaining Lottery Compounds in the RXR category in accordance with subsection (e) below; (b) Allergan shall then have the initial selection of one Lottery Compound from each of the RAR alpha selective category and the RAR antagonist category. Ligand shall then have the right to select two (2) Lottery Compounds in each of such categories. Thereafter, Allergan and Ligand shall alternate selecting single Lottery Compounds in each of these categories (with Allergan selecting first in each category) until such time as either (i) there are no Lottery Compounds remaining in such categories or (ii) Allergan and Ligand mutually agree to divide the remaining Lottery Compounds in such categories in accordance with subsection (e) below; (c) Ligand shall then have the right to select the next category of Lottery Compounds to be subject to the Lottery and will have the first selection of a single Lottery Compound in such category. Allergan shall then have the right to select two (2) Lottery Compounds in such category. Thereafter, Ligand and Allergan shall alternate selecting single Lottery Compounds in such category (with Ligand selecting first) until such time as either (i) there are no Lottery Compounds remaining in such category or (ii) Allergan and Ligand mutually agree to divide the remaining Lottery Compounds in such category in accordance with subsection (e) below; (d) The process described in subsection (c) above shall continue with each of Ligand and Allergan alternating selection of a category of Lottery Compounds (with Allergan selecting first). The Party selecting such category shall be the first to select a Lottery Compound in such category, the other party selecting the second and third Lottery Compounds in such category and the parties thereafter alternating single selections until such time as either (i) there are no Lottery Compounds remaining in such category or (ii) Allergan and Ligand mutually agree to divide the remaining Lottery Compounds in such category in accordance with subsection (e) below; and (e) At any time during Allergan's and Ligand's selection of Lottery Compounds in a given category, Allergan and Ligand may, by mutual agreement, elect to divide the remaining Lottery Compounds in such category between them on an equal and random basis, or by such other means as the parties may choose. In the event that the parties are unable to agree on a method of allocation of the remaining Lottery Compounds in such category, the parties -14- 20 shall resume alternating selections as described in subsection (d) above until all Lottery Compounds in such category have been selected by a party. 3.3 SELECTED COMPOUNDS. Following completion of the Lottery and on or prior to the Closing Date, Lottery Compounds selected by Allergan or Ligand pursuant to the Lottery shall be added to Exhibits G and H, respectively, and shall thereupon be deemed Allergan Selected Compounds and Ligand Selected Compounds, respectively, for purposes of this Agreement. All then existing supplies of Allergan Selected Compounds and Ligand Selected Compounds shall thereupon be delivered to and owned, respectively, by Allergan, on one hand, and Ligand and ALRT, on the other hand (except that Ligand, with respect to Allergan Selected Compounds, and Allergan, with respect to Ligand Selected Compounds, shall be entitled to retain research quantities of such supplies in an amount equal to the lesser of (i) fifty percent (50%) of the total amount of each such Selected Compound, respectively, in the Parties' possession and control as of the Closing Date or (ii) 50 mg of each such Selected Compound, respectively). 4. FEE. On the Effective Date, Ligand shall pay to Allergan or its designated Affiliate a non-refundable cash payment in the amount of $4,500,000. 5. ROYALTY PAYMENTS. 5.1 ROYALTY PAYMENTS TO ALLERGAN. The following royalty payments shall be made to Allergan during the Royalty Term on a country-by-country basis. It is understood that royalties shall be calculated based upon each and every invoiced sale on which a royalty is owed of Program Products or Compound 1069 Products in accordance with the provisions set forth below in this Section 5.1 and in Section 1.40, which payments may be made by either Ligand or ALRT (provided that Ligand shall remain obligated under this Section 5.1 with respect to all royalties payable hereunder): 5.1.1 COMPOUND 1069. Royalties equal to (i) *** of Net Sales of Compound 1069 Products by Ligand, ALRT and/or any other Affiliate of Ligand and (ii) thirty-three and one-third percent (33-1/3%) of any and all royalties payable to Ligand, ALRT and/or any other Affiliate of Ligand by Third Parties with respect to sales of Compound 1069 Products, in each case for all indications excluding Cancer Indications and Eye or Skin Indications. 5.1.2 COMPOUND 268. Royalties equal to the greater of (i) six percent (6%) of Net Sales of Compound 268 Products for all indications or (ii) fifty percent (50%) of any and all royalties payable to Ligand, ALRT and/or any other Affiliate of Ligand by Third Parties with respect to sales of Compound 268 Products for all indications. 5.1.3 COMPOUND 324. Royalties equal to the greater of (i) six percent (6%) of Net Sales of Compound 324 Products for all indications or (ii) fifty percent (50%) of any and all royalties payable to Ligand, ALRT and/or any other Affiliate of Ligand by Third Parties with respect to sales of Compound 324 Products for all indications. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -15- 21 5.1.4 COMPOUND 1057. Royalties equal to (i) fifteen percent (15%) of Net Sales in North America of Compound 1057 Products for all indications and (ii) *** of Net Sales outside of North America of Compound 1057 Products for all indications. 5.1.5 OTHER LIGAND SELECTED COMPOUNDS. Royalties equal to six percent (6%) of Net Sales of Program Products incorporating any dosage form of a Ligand Selected Compound (excluding Compound 268, Compound 324 and Compound 1057) for all indications. 5.1.6 LIGAND EXCLUSIVE UNSYNTHESIZED COMPOUNDS. Royalties equal to *** of Net Sales of Ligand Exclusive Unsynthesized Compounds in any dosage form which is covered by a Patent for which Allergan incurs Patent Costs under Section 9.1.3. For purposes of this Agreement, "covered by a Patent" shall mean that the manufacture, use or sale of the subject compound would, in the absence of rights under such patent, infringe a claim under such patent which has not expired and which has not been held unenforceable, unpatentable or invalid by a decision of a court or other governmental agency of competent jurisdiction following exhaustion of all possible appeal processes, and which has not been admitted to be invalid or unenforceable through reissue, reexamination or disclaimer. Further, for purposes of this Agreement, the determination of whether a compound is covered by a Patent shall be made on a country-by-country basis. 5.2 ROYALTY PAYMENTS TO LIGAND. Allergan shall make the following royalty payments to Ligand (which shall be allocated by Ligand between Ligand and ALRT) during the Royalty Term on a country-by-country basis: 5.2.1 ALLERGAN SELECTED COMPOUNDS. Royalties equal to six percent (6%) of Net Sales of Program Products incorporating any dosage form of an Allergan Selected Compound for all indications. 5.2.2 ALLERGAN EXCLUSIVE UNSYNTHESIZED COMPOUNDS. Royalties equal to *** of Net Sales of Allergan Exclusive Unsynthesized Compounds in any dosage form which is covered by a Patent for which Ligand incurs Patent Costs under Section 9.1.3. 6. MILESTONE PAYMENTS. Ligand shall make the following milestone payments to Allergan: (a) Thirty-three and one-third percent (33-1/3%) of any and all upfront cash payments made to Ligand, ALRT and/or any other Affiliate of Ligand by one or more Third Parties (other than pursuant to the currently proposed transaction with that certain large pharmaceutical company hereinafter referred to as Company X) with respect to the licensing of Compound 268 and/or Compound 324 for any and all indications, excluding payments received by Ligand solely for the purchase of equity securities in which Ligand and the Third Party have agreed to a premium of no more than *** over the fair market value of such securities, where "fair market value" is as defined in Ligand's agreement with such Third Party; provided, however, that in no event shall such fair market value be defined as an amount which is less than the average of the last sales prices of such securities as traded on the Nasdaq National Market for the number of trading days preceding (A) the date such Third Party agreement is publicly announced, or (B) if no public announcement is made, the date such agreement is signed, *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -16- 22 which is equal to (i) the number of days specified in such agreement, if so specified and if such number exceeds five (5) days or (ii) five (5) days, if such number is not so specified or does not exceed five (5) days; and (b) thirty-three and one-third percent (33-1/3%) of any and all milestone payments payable to Ligand by one or more Third Parties with respect to Compound 268 and/or Compound 324 for any and all indications. For purposes of this subsection (b) only, the term "milestone payments" shall include all cash payments made to Ligand with respect to the achievement of any research, development or commercialization milestone or similar event, including, but not limited to, identification of an active compound, selection of a lead compound, initiation of preclinical studies, filing of an IND, initiation of clinical trials, filing of a Drug Approval Application with the FDA or the equivalent application in any other country or jurisdiction, or Regulatory Approval. 7. PAYMENT; RECORDS; AUDITS. 7.1 PAYMENT; REPORTS. Royalty payments and reports for the sale of Program Products and Compound 1069 Products and milestone payments due hereunder shall be calculated and reported for each calendar quarter. All such payments due to a Party under this Agreement shall be paid (i) within forty-five (45) days of the end of each calendar quarter or (ii) in connection with payments under any agreement between the Paying Party and a Third Party, within forty-five (45) days of the end of the calendar quarter in which such payments are received by the Paying Party (but not later than the end of the calendar quarter following the calendar quarter in which such payments would be due under the foregoing clause (i)). Each such payment shall be accompanied by a report of Net Sales of Program Products and Compound 1069 Products, as applicable, and milestone payments in sufficient detail to permit confirmation of the accuracy of the payment made, including, without limitation, the number of such Products sold, the gross sales and Net Sales of such Products, royalty and milestone payments received and payable, in U.S. dollars, the method used to calculate the same and the exchange rates used. 7.2 EXCHANGE RATE; MANNER AND PLACE OF PAYMENT. All payments hereunder shall be payable in U.S. dollars. With respect to each quarter, for countries other than the United States, whenever conversion of payments from any foreign currency shall be required, such conversion shall be made (i) at the rate of exchange reported in The Wall Street Journal either on a daily basis or on the last business day of the applicable quarter, or (ii) in accordance with the terms of any agreement between the paying Party and a Third Party with respect to which such payment is being made, in each case, at the payor's option consistently applied. All payments owed under this Agreement shall be made by wire transfer to a bank and account designated in writing by the payee, unless otherwise specified by such payee. 7.3 RECORDS AND AUDITS. During the Royalty Term and for three (3) years thereafter, each Party shall maintain and keep complete and accurate records and books of account documenting all of Net Sales with respect to which any royalty may be payable by them hereunder and documenting all milestone payments that may be payable by Ligand hereunder; provided that no Party shall be required to maintain or keep such records or books with respect to any Net Sales or milestone payments for more than three (3) years following the end of the -17- 23 fiscal year in which such Net Sales or milestone payments occurred or became payable. In order to permit Allergan to confirm the accuracy of all milestone payments due under this Agreement, Allergan shall have the right to review, under standard confidentiality terms, any agreement (with non-commercial terms redacted as filed with and granted confidential treatment by the SEC or, if not so filed, in a manner otherwise substantially compliant with SEC requirements applicable to public companies filing material agreements) that Ligand may enter into with respect to Compound 268 and/or Compound 324. Accordingly, upon the execution of any agreement pursuant to which Ligand may be or become entitled to receive any cash payments with respect to Compound 268 and/or Compound 324, Ligand shall provide prompt written notice thereof to Allergan. Thereafter, Ligand shall, upon receipt of written notice from Allergan that it wishes to review the terms of such agreement (which notice shall be given in Allergan's sole discretion), promptly provide Allergan with a copy of such agreement (which may be so redacted). After Allergan has had a reasonable opportunity to review such agreement, Allergan shall, at Ligand's option, either return all copies of such agreement to Ligand or destroy such copies; provided, however, that Allergan may maintain one copy of each such agreement for its records. At the request and expense of either Allergan or Ligand or any of its Affiliates, the other Party and its Affiliates shall permit an independent certified public accountant appointed by the requesting Party and reasonably acceptable to the other Party, at reasonable times and upon reasonable notice (but not exceeding once in any twelve (12) month period), to examine those records as may be necessary to determine, with respect to any calendar year ending not more than three (3) years prior to such Party's request, the correctness of any royalty or milestone payments or nonpayments hereunder (including but not limited to an unredacted copy of any applicable agreement to which such other Party is a party). Results of any such examination shall be made available to the Parties. Said independent certified public accountant shall verify to the requesting Party only the amounts of royalties or milestone payable hereunder and disclose no other information revealed in its audit. If such certified independent public accountant reasonably determines that any royalties or milestone payments have been, for any calendar year, underpaid by either Allergan or Ligand (the "Paying Party"), then the Paying Party shall immediately pay the full amount of such underpayment to the other Party plus interest on the unpaid amount accrued from the date such payment was due until the date paid at the then applicable commercial prime lending rate of Citibank, N.A., New York (or equivalent banking institution) and, if such underpayment is equal to or greater than ten percent (10%) of the amount actually due, then the Paying Party, subject to the right to seek recourse under Section 14.15, shall promptly pay to the other Party all reasonable fees and disbursements of such certified independent public accountant incurred in the course of examining the Paying Party's records and books. Notwithstanding the foregoing, however in the event of any dispute regarding the obligation to pay amounts alleged to be payable under this Section 7.3, payment of such amounts may be deferred pending resolution of such dispute (at which time such amounts shall be paid in full with interest at the rate specified above to the extent such alleged obligation to pay such amounts is confirmed pursuant to such resolution). Any disputes under this Section 7.3 shall be resolved in accordance with Section 14.15. If the audit reveals an overpayment, the amount overpaid may be claimed as a credit against future royalties to be paid under this Agreement. -18- 24 7.4 COMBINATION PRODUCTS. For purposes of this Agreement, "Combination Product" means a product in a single dosage form which, in addition to utilizing or containing a Program Compound or Compound 1069, contains another component as an active ingredient and which receives Regulatory Approval for medical uses. Net Sales of Combination Products shall be calculated by multiplying the amounts received by a Party, its sublicensee(s) or assignee(s) attributable to Combination Products by the Combination Allocation Portion (as defined below) attributable to such Combination Product. The "Combination Allocation Portion," as used herein, shall mean that portion of any amounts received by a Party, its sublicensee(s) or assignee(s) from the sale of any Combination Product that results from multiplying the total amount received by a Party, its sublicensee(s) or assignee(s) from such sale by a fraction, the numerator of which is the fair market value of the Program Compound or Compound 1069 included in the Combination Product and the denominator of which is the fair market value of such Program Compound or Compound 1069 and the fair market value of the biologically active component(s) of such Combination Product which are neither Program Compounds nor Compound 1069. Fair market value shall be determined in good faith by Allergan and Ligand in the event that no market price is available. However, in no event shall any royalty payable under this Agreement be reduced by reason of any reduction under this Section below *** of the rate otherwise specified in this Agreement. Any dispute under this Section 7.4 shall be resolved in accordance with Section 14.15. 7.5 WITHHOLDING OF TAXES. Any withholding of taxes levied by tax authorities on the payments hereunder shall be borne by the party receiving the payment and deducted by the party making the payment from the sums otherwise payable by it hereunder for payment to the proper tax authorities on behalf of the party receiving the payment. The party making the payment agrees to cooperate with the party receiving the payment in the event that the receiving party claims exemption from such withholding or seeks credits or deductions under any double taxation or similar treaty or agreement from time to time in force, such cooperation to consist of providing receipts of payment of such withheld tax or other documents reasonably available to the party making the payment. 7.6 PROHIBITED PAYMENTS. Notwithstanding any other provision of this Agreement, if a party is prevented from paying any such payment by virtue of the statutes, laws, codes or governmental regulations of the country from which the payment is to be made, then such payment may be paid by depositing funds in the currency in which accrued to the other party's account in a bank acceptable to such other party in the country whose currency is involved. 8. REPRESENTATIONS, WARRANTIES AND COVENANTS. 8.1 REPRESENTATIONS, WARRANTIES AND COVENANTS BY THE PARTIES. Each Party hereby represents, warrants and covenants to each other Party, as of the date such Party becomes a party to this Agreement, as follows: 8.1.1 CORPORATE POWER. It is duly organized and validly existing under the laws of Delaware and has full corporate power and authority to enter into this Agreement and to carry out the provisions hereof. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -19- 25 8.1.2 DUE AUTHORIZATION. It is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder. 8.1.3 BINDING AGREEMENT. This Agreement is a legal and valid obligation binding upon it and enforceable in accordance with its terms. The execution, delivery and performance of this Agreement by it does not conflict in any material respect with any 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. 8.1.4 GRANT OF RIGHTS; MAINTENANCE OF AGREEMENTS AND PATENTS. It has not, and shall not during the term of this Agreement, grant any right to any Third Party relating to the Field which would violate the terms of or conflict with the rights granted to any other Party pursuant to this Agreement. It has (or will have at the time performance is due) maintained and will keep in full force and effect all agreements (including license agreements) and filings (including patent filings) necessary to perform its obligations hereunder (including but not limited to, with respect to Ligand, agreements and patent filings relating to the Co-Transfection Assay). 8.1.5 VALIDITY. It is aware of no action, suit or inquiry or investigation instituted by any federal, state, local or foreign governmental agency or instrumentality which questions or threatens the validity of this Agreement. 8.1.6 REGULATORY FILINGS. Promptly following the date hereof, Allergan and Ligand shall make any and all applicable filings required with respect to the transactions contemplated under this Agreement pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (the "HSR Act"). Allergan's and Ligand's respective obligations under this Agreement shall be subject to the expiration or early termination, on or prior to the Closing Date, of any applicable waiting period under the HSR Act with respect to such filings. 8.2 PROGRAM TECHNOLOGY. The Parties agree that "Program Technology," as defined in Section 1.90 of the Glossary to the Program Agreements, survived and became Program Technology under this Agreement and that Allergan acquired a fifty percent (50%) undivided interest therein at the Closing Date as Allergan Technology upon its exercise of the Asset Purchase Option and that Ligand (through its ownership of all outstanding ALRT stock) retained a fifty percent (50%) undivided interest therein at the Closing Date as Ligand Technology and that Allergan has relinquished no rights to Allergan Technology except as expressly provided under this Agreement, and that Ligand and ALRT have relinquished no rights to Ligand Technology except as expressly provided under this Agreement. For purposes of further clarifying the rights constituting the Program Technology as defined in this Agreement, each of Allergan and Ligand agree that the intellectual property licensed to ALRT pursuant to the first sentences of Sections 2.1.1, 2.1.2, 2.2.1 and 2.2.2 of the Technology License Agreement dated June 3, 1995 among Allergan, Ligand and ALRT (the "Prior License Agreement"), disregarding the final clause in each such sentence cross-referencing other sections of the Prior License Agreement, constitutes both Ligand Technology and Allergan Technology, to the extent owned or Controlled by or licensed to ALRT immediately prior to exercise of the Stock Purchase Option. To the extent, and only to the extent, necessary to cause the immediately preceding -20- 26 sentence to be true and accurate, each of Allergan, Ligand and ALRT hereby agree that the licenses contained in the first sentence of such sections of the Prior License Agreement (disregarding such cross-referencing clauses) shall continue indefinitely on a non-exclusive basis, and shall not terminate upon termination of the Prior License Agreement. For purposes of this Agreement and the Program Agreements, the Parties agree that a "fifty percent (50%) undivided interest" means that subject to the terms of this Agreement and the Transition Plan (including but not limited to the licenses granted in Section 2 and the royalty and milestone provisions of Sections 5 and 6 of this Agreement), Allergan and Ligand are free to use the Program Technology in any manner and for any purpose without any obligation to any other Party by reason thereof, including but not limited to any obligation to account to, pay royalties to, or obtain consent from any other Party. The Parties further covenant and agree that no Party shall assert in a claim against another Party, or defend a claim asserted by another Party, on the basis that Program Technology as defined in Section 1.90 of the Glossary to the Program Agreements, did not transfer to and become, collectively, Program Technology as defined in this Agreement upon the Closing Date or which is otherwise inconsistent with the foregoing. To the extent that, by reason of any provision of the second paragraph of Section 1.52, "Program Technology" for purposes of this Agreement could be interpreted to be broader than "Program Technology" as used in Section 1.90 of the Glossary to the Program Agreements, then for the avoidance of doubt "Program Technology" for purposes of this Agreement shall also include all additional rights included in such broader interpretation. This Section 8.2 shall supersede any contrary provision of the Program Agreements (including without limitation the termination provisions of Section 9.3.1 of the Prior License Agreement). 8.3 REPRESENTATIONS, WARRANTIES AND COVENANTS BY LIGAND. Ligand hereby represents, warrants and covenants to Allergan as follows: 8.3.1 COMPOUND 1069. Prior to the date hereof, Ligand has delivered or made available to Allergan copies of substantially all information relevant to Compound 1069 and its medical potential which has previously been disclosed by Ligand to Third Parties in connection with potential Corporate Partnering Transactions (other than with respect to Cancer Indications and Eye and Skin Indications). 8.3.2 CORPORATE PARTNERING TRANSACTION WITH COMPANY X. Prior to the date hereof, Ligand has delivered to Allergan true, complete and correct copies of a draft Development and License (Targretin) Agreement and a Draft Collaboration Agreement, each between Company X and Ligand, under cover of a letter dated September 17, 1997 from *** of Ligand to *** of Allergan, with non-financial terms redacted in a manner substantially consistent with SEC filing requirements for public companies filing material agreements. Ligand agrees to promptly deliver to Allergan copies of such subsequent drafts of such agreements in Ligand's possession or control subsequent to the date of such letter and prior to the Closing Date as are requested by Allergan (but no more frequently than once per week). Ligand hereby represents, warrants and covenants that the provisions in such agreements providing for royalty and milestone payments to Ligand, when and as executed and delivered by Ligand and Company X, shall be *** *** , such as so delivered to Allergan under cover of such letter. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -21- 27 8.4 NON-SOLICITATION OF EMPLOYEES. Until the date that is two (2) years after the Closing Date: 8.4.1 ALLERGAN NON-SOLICITATION. Allergan shall not, without the written consent of Ligand, solicit into the employment of Allergan or any Affiliate any person who during the course of employment by Ligand was at any time involved with activities related to the Research, Development or Commercialization within the Field. 8.4.2 LIGAND NON-SOLICITATION. Ligand shall not, without the written consent of Allergan, solicit into the employment of Ligand or any Affiliate any person who during the course of employment by Allergan was at any time involved with activities related to the Research, Development or Commercialization within the Field. 8.5 CORPORATE PARTNERING RESTRICTIONS. 8.5.1 Ligand agrees that for a period of *** following the Effective Date, it will not enter into a Corporate Partnering Transaction with any Third Party which involves Research, Development and/or Commercialization of any Ligand Selected Compounds (other than Compound 1057) for Eye or Skin Indications. 8.5.2 Allergan agrees that for a period of *** following the Effective Date, it will not enter into a Corporate Partnering Transaction with any Third Party which involves Research, Development and/or Commercialization of any Allergan Selected Compounds for Cancer Indications. 9. DISCLOSURE AND USE OF TECHNOLOGY AND RIGHTS. 9.1 PATENT PROSECUTION. Allergan shall diligently file, prosecute, issue and maintain Patent Applications and Patents issuing therefrom arising out of inventions made solely by Allergan employees or consultants; and Ligand shall diligently file, prosecute, issue and maintain Patent Applications and Patents issuing therefrom arising out of inventions made solely by Ligand employees or consultants. Patent Applications and Patents issuing therefrom arising out of joint inventions between Allergan and Ligand shall be prosecuted and maintained by the Party best placed to carry out such activities, as reasonably determined by Allergan and Ligand. Each of Allergan and Ligand shall pursue prosecution and maintenance activities hereunder according to their respective internal standards to effectively cover discoveries and inventions in the Field made by their respective employees and consultants. Allergan and Ligand shall discuss and evaluate with each other such discoveries and inventions, including joint discoveries and inventions, and shall confer regarding the advisability of filing Patent Applications to cover those discoveries and inventions, including the countries in which such Patent applications should be filed. Each of Allergan and Ligand shall submit to the other a substantially complete draft of each Patent Application that is directed to an invention or discovery either useful in the Field or which is applicable to Program Technology, in each case which has been licensed to the other Party hereunder (other than counterparts of filings previously made) for review and comment at least *** prior to the contemplated filing date, provided that in those circumstances *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -22- 28 where a Party believes time is of the essence, it shall endeavor to provide each other Party such advance notice as it reasonably can under the circumstances. 9.1.1 CONSULTATION. Each of Allergan and Ligand shall endeavor to follow guidance provided by the other Party with respect to the necessity and timing of filing relevant Patent Applications. Each of Allergan and Ligand shall endeavor to ensure that all relevant Patent Applications are filed before any public disclosure of the discovery or invention claimed by the application. Allergan and Ligand shall confer with each other regarding the prosecution of such Patent Applications and shall provide each with periodic reports regarding the status of Patents and Patent Applications applicable to the Field. Each of Allergan and Ligand shall ensure that the other Party has a complete and up-to-date file history for each such Patent Application. 9.1.2 MUTUAL GRANT OF AUTHORITY. Should any Party not wish to file, prosecute, maintain or issue a Patent Application or maintain a Patent in the Field at all or in a particular country, then such Party shall provide the other Party with reasonable written notice thereof and, at the request of any other Party and at such other Party's expense, grant any necessary authority to such other Party to file, prosecute, maintain and issue such a Patent Application or maintain such a Patent in the name of the Party holding rights to such Patent Application or Patent. Nothing in this Section 9.1.2, however, shall preclude a Party from abandoning a Patent Application in favor of a continuation application or a continuation-in-part application thereof, or to seek reissue or re-examination of a Patent, and no obligation hereunder is implied so as to permit another Party to prosecute such abandoned Patent Application or provide rights to a Patent subject to reissue or re-examination which would be inconsistent with the right to seek reissuance or re-examination. 9.1.3 FEES AND COSTS. Except as provided in Section 9.1.2, Patent Costs shall be borne by the filing Party. 9.2 INFRINGEMENT. 9.2.1 NOTIFICATION OF INFRINGEMENT. Each Party shall notify the other Party of any infringement by any Person of any Patent and shall provide the other Party with the available evidence, if any, of such infringement. 9.2.2 ENFORCEMENT OF PATENT RIGHTS. 9.2.2.1 If any Party has actual notice of infringement by any Person of any Patent, Allergan and Ligand shall confer to determine in good faith (a) an appropriate course of action and (b) the Party best suited to carrying out such course of action. If the Parties determine that enforcement of the Patent is appropriate, the Party determined by Allergan and Ligand as best suited to carrying out such course of action shall take such action. If Allergan and Ligand are unable to come to an agreement regarding the appropriate course of action, either Allergan or Ligand may, if the Patent covers a compound which is a Selected Compound of such Party, upon written notice to the other take any appropriate course of action, including, commence litigation with respect to the alleged or threatened infringement, with the Party proceeding with the infringement action bearing all costs thereof. The costs of any action -23- 29 commenced pursuant to this Section 9.2.2.1, including attorneys' fees and expenses, shall be borne by the Party taking action, unless approved in writing in advance by the other Party, in which case such costs shall be shared equally. In all cases, the Parties shall cooperate fully, including if required to bring such action, the furnishing of a power of attorney. No Party shall have the right to settle any patent infringement litigation under this Section 9.2.2.1 in a manner that diminishes the rights or interests of the other Party without the consent of such other Party. Any recovery realized resulting from infringement in the Field as a result of such litigation shall be shared in accordance with the costs contributed by each Party to such action. 9.2.2.2 Each Party shall promptly notify the other Party in writing of any allegation by a Third Party that the activity of any Party in the Field infringes or may infringe the intellectual property rights of such Third Party. The Parties shall then seek to agree on a common strategy to respond to such allegation. In the absence of agreement, each Party may take such action as it deems in its best interest. 9.3 COOPERATION. Each Party agrees to cause each of its employees and agents to take all actions and to execute, acknowledge and deliver all instruments or agreements reasonably requested by any other Party, and necessary for the perfection, maintenance, enforcement or defense of that Party's rights as set forth above. 10. CONFIDENTIALITY. 10.1 OBLIGATION OF NON-DISCLOSURE. Subject to this Section 10, any Information (a) communicated by the Parties under any of the Program Agreements or this Agreement; or (b) communicated by a Party to another Party prior to the Effective Date; or (c) communicated by one Party to the other Party in accordance with Section 9, shall be maintained by the receiving Party in strict confidence and shall not be disclosed by any Party to any Third Party, except as provided in Sections 10.1.1, 10.2, 10.4 or 10.5 or to an Affiliate of the Party, to a consultant retained by the Party or retained by an Affiliate of the Party, or to any other Person approved in advance by the other Parties, unless such Affiliate, consultant or other Person agrees to be bound substantially to the same extent as the Parties under this Section 10.1. Nothing shall prevent a Party from disclosing or sharing Information that also applies outside of the Field, provided that such disclosure or sharing is for the purpose of and is useful for drug discovery, research or development outside of the Field and the Third Party receiving such Information agrees to be bound substantially to the same extent as the Parties under this Section 10.1. The obligations set forth in this Section 10.1 shall survive for a period of five (5) years from the Effective Date. Without limiting the generality of the foregoing, each Party shall use commercially reasonable efforts to obtain, if not already in place, confidentiality agreements from their respective employees and agents, similar in scope to this Section 10.1, to protect the Information. 10.1.1 EXCEPTIONS. The Section 10.1 obligation of non-disclosure of Information shall apply to all such Information except that which: (a) becomes known to the receiving Party from a Third Party under no obligation of non-disclosure regarding such Information; (b) is public knowledge or later becomes public knowledge through no act on the part of the receiving Party; (c) is released from the restrictions of this Section 10.1 by the express written consent of the disclosing Party; (d) is disclosed to any permitted assignee or permitted sublicensee or -24- 30 permitted subcontractor of either Allergan or Ligand hereunder (if such assignee or sublicensee is subject to the provisions of this Section 10.1 or substantially similar provisions); or (e) is required by law, statute, rule or court order to be disclosed (the disclosing Party shall, however, notify the Party whose Information is required to be disclosed, which Party shall be entitled to direct the efforts to be taken to obtain confidential treatment of any such disclosure and shall be entitled to the cooperation of the other Party as required). Nothing in this Section 10.1 shall prevent a Party from disclosing Information received hereunder or generated solely by such Party to government authorities which is necessary, in the good faith opinion of such Party, to receive Patents and/or government permission to make, have made, use, sell, supply or import Program Products. 10.2 PERMITTED DISCLOSURES. Notwithstanding the provisions of Section 10.1 hereof, Allergan, Ligand or ALRT may, to the extent necessary, disclose and use Information, consistent with the rights of Allergan, Ligand and ALRT otherwise granted hereunder (a) to the extent necessary or useful in conducting activities which are the subject of the licenses granted hereunder (including disclosure to sublicensees or potential sublicensees or in connection with other business relationships in connection with a potential Corporate Partnering Transaction or Change of Control), (b) for the purpose of securing institutional or government approval to conduct Development or Commercialization of any Program Product, or (c) for the purpose of securing patent protection for an invention within the scope of the Program Technology; provided, that the disclosing Party in each case obtains an agreement from any Person to whom such Information is disclosed to preserve the confidentiality thereof upon terms reasonably equivalent to those set forth herein. 10.3 PUBLICATIONS. Each Party shall submit to each other Party manuscripts, including abstracts, and texts of poster presentations and other presentations, (a) of any research applicable to the Field and (b) containing confidential Information that has been invented or developed by ALRT, invented or developed jointly by Allergan, on the one hand, and Ligand or ALRT, on the other hand, or that is jointly owned by Allergan, on the one hand, and Ligand or ALRT, on the other hand, at least thirty (30) days prior to presentation or submission for publication for purposes of allowing Allergan, in the case where Ligand or ALRT is the submitting party, or Ligand or ALRT, in the case where Allergan is the submitting party, to request the filing by the submitting Party of a Patent Application under Section 9.2, or initiate the filing of a Patent Application under Section 9.2.2 prior to publication of any such Information. 10.4 PUBLICITY REVIEW. Allergan and Ligand shall consult with each other on any statements to be made to the public with respect to the transactions contemplated by this Agreement and any related Corporate Partnering Transactions which occur on or prior to December 31, 1997. If Allergan or Ligand is required by law or regulation to make a public disclosure or announcement concerning such matters, such Party shall give reasonable prior advance notice of the proposed text of such disclosure or announcement to the other Party for its review and comment. The principles to be observed by Allergan or Ligand shall be: accuracy, the requirements for confidentiality under Section 10, the advantage a competitor of Allergan or Ligand may gain from any public statements under this Section 10.4, the requirements of disclosure under any applicable securities laws or regulations, and the standards and customs in -25- 31 the pharmaceutical industry for such disclosures by companies comparable to Allergan and Ligand. 10.5 SURVIVAL. Except as set forth in Section 10.1, the rights and obligations set forth in this Section 10 shall survive any termination of this Agreement. 11. DISCLAIMER OF WARRANTY; CONSEQUENTIAL DAMAGES. 11.1 DISCLAIMER OF WARRANTY. Nothing in this Agreement shall be construed as a representation made or warranty given by any Party hereto that any Patents shall issue based on pending applications within the Patent Rights, or that any such Patent Rights which do issue shall be valid, or that the practice by any Party hereto of any license granted hereunder, or that the use of any Program Technology licensed hereunder, shall not infringe the patent or proprietary rights of any other Person. Allergan, Ligand and ALRT acknowledge that THE RETINOID TECHNOLOGY IS LICENSED AS IS AND ALLERGAN, LIGAND AND ALRT EXPRESSLY DISCLAIM AND HEREBY WAIVE, RELEASE AND RENOUNCE ANY WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO SUCH TECHNOLOGY, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NONINFRINGEMENT. Except as expressly set forth in this Agreement, Allergan, Ligand and ALRT disclaim all warranties of any nature, express or implied. 11.2 CONSEQUENTIAL DAMAGES. NO PARTY TO THIS AGREEMENT SHALL BE ENTITLED TO RECOVER FROM ANY OTHER PARTY ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES. 12. INDEMNIFICATION. 12.1 INDEMNIFICATION BY ALLERGAN. Allergan hereby agrees to indemnify and hold Ligand and its Affiliates and their respective agents and employees harmless from and against any and all suits, claims, actions, demands, liabilities, expenses and/or losses, including reasonable legal expenses and attorneys' fees ("Losses"), including, without limitation, any claim or liability based upon negligence, warranty, strict liability, violation of government regulation or infringement of patent or other proprietary rights, arising from or occurring as a result of (a) the use of the Program Technology or the Non-Retinoid Technology by Allergan or any Affiliate, agent or sublicensee of Allergan, (b) the research, development, manufacture, sale or use of Allergan Selected Compounds or (c) subject to Section 11.2, any material breach of this Agreement by Allergan. Allergan shall have no indemnification obligations hereunder in any case where such Losses are based upon the gross negligence or willful misconduct of Ligand. 12.2 INDEMNIFICATION BY LIGAND. Ligand hereby agrees to indemnify and hold Allergan and its Affiliates and their respective agents and employees harmless from and against any and all Losses, including, without limitation, any claim or liability based upon negligence, warranty, strict liability, violation of government regulation or infringement of patent or other proprietary rights, arising from or occurring as a result of (a) the use of the Program Technology or the Non-Retinoid Technology by Ligand or any Affiliate, agent or sublicensee of Ligand, (b) the research, development, manufacture, sale or use of Ligand Selected Compounds or (c) subject -26- 32 to Section 11.2, any material breach of this Agreement by Ligand. Ligand shall have no indemnification obligations hereunder in any case where such Losses are based upon the gross negligence or willful misconduct of Allergan. 12.3 NOTICES; PARTICIPATION. Each Party shall promptly notify the other Party of any claim of Losses with respect to which such Party is seeking indemnification hereunder, upon becoming aware thereof. The indemnified Party, at the indemnifying Party's cost, shall be permitted to retain counsel and to defend against such claim of Losses. All costs and expenses reasonably incurred by the indemnified Party hereunder shall be reimbursed to the indemnified Party by the indemnifying Party as incurred and the indemnifying Party may, at its option and expense, have its own counsel participate in any proceeding that is under the direction of the indemnified Party and will cooperate with the indemnified Party in the disposition of any such matter. Notwithstanding the foregoing, notices and participation in actions regarding Patent infringement shall be governed by Section 9.3.2.2 hereunder. 12.4 SURVIVAL. The rights and obligations set forth in this Section 12 shall survive any termination of this Agreement. 13. TERM AND TERMINATION. 13.1 TERM. This Agreement shall become effective as of the Effective Date and, unless and until sooner terminated as provided in Sections 13.2 or 13.3 hereof, shall continue in full force and effect indefinitely; provided, however, that the provisions of Sections 3 and 9.1 shall be effective as to the Parties as of the date hereof. 13.2 TERMINATION BY MUTUAL AGREEMENT. By mutual agreement, the Parties may at any time terminate this Agreement on mutually acceptable terms. 13.3 RIGHTS IN BANKRUPTCY. All rights and licenses granted under or pursuant to this Agreement by Allergan, Ligand and ALRT are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the Bankruptcy Code, licenses of rights to "intellectual property" as defined under Section 101 of the Bankruptcy Code. The Parties agree that Allergan, Ligand and ALRT, as licensees of such rights under this Agreement, shall retain and may fully exercise all of their rights and elections under the Bankruptcy Code. The Parties further agree that, in the event of the commencement of a bankruptcy proceeding by or against Allergan, Ligand or ALRT under the Bankruptcy Code, the Party hereto which is not a Party to such proceeding shall be entitled to a complete duplicate of (or complete access to, as appropriate) any such intellectual property and all embodiments of such intellectual property, and same, if not already in their possession, shall be promptly delivered to them (a) upon any such commencement of a bankruptcy proceeding upon their written request therefore, unless the Party subject to such proceeding elects to continue to perform all of its obligations under this Agreement, or (b) if not delivered under (a) above, upon rejection of this Agreement by or on behalf of the Party subject to such proceeding upon written request therefor by any non-subject Party. 13.4 NO TERMINATION FOR BREACH. Without limitation of the foregoing, it is the intent of the Parties that the sole and exclusive remedies for any Party with respect to any breach or -27- 33 failure to perform under this Agreement by the other Party shall be money damages and/or appropriate injunctive relief and that this Agreement shall not be terminated by reason of such breach or non-performance. 14. MISCELLANEOUS. 14.1 RETAINED RIGHTS. Nothing in this Agreement shall limit in any respect the right of any Party to conduct research and development in, and market products outside of, the Field using such Party's technology, and except as expressly provided in Section 2 of this Agreement, no license to use the other Party's technology to do so is granted herein. 14.2 FORCE MAJEURE. No Party shall lose any rights hereunder or be liable to any other Party for damages or losses on account of failure of performance by the defaulting Party if the failure is occasioned by Force Majeure and the Force Majeure shall extend any applicable cure periods provided for herein; provided that the Party claiming Force Majeure has exerted all reasonable efforts to avoid or remedy such Force Majeure; provided, further, that in no event shall a Party be required to settle any labor dispute or disturbance. 14.3 FURTHER ACTIONS. Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement. 14.4 NO TRADEMARK RIGHTS. No right, express or implied, is granted by this Agreement to use in any manner the name "Allergan" or "Ligand" or any other trade name or trademark of another Party or its Affiliates in connection with the performance of this Agreement. All rights to the trademarks "PANRETIN" and "DURARET" shall belong solely to Ligand and/or ALRT. Notwithstanding the foregoing, (i) no later than forty-five (45) days following the Closing Date the legal name for ALRT shall be amended by Ligand to remove any reference to Allergan, and (ii) both Allergan and Ligand shall have the right to use the acronym "ALRT" solely for purposes of identifying the following Selected Compounds: 268, 324, 1057, 1550, 4310 and the first two compounds selected by Allergan from the RXR category pursuant to Section 3.2(a). -28- 34 14.5 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by facsimile transmission (receipt verified), or upon receipt if mailed by registered or certified mail (return receipt requested), postage prepaid, or sent by express courier service (receipt verified), to the Parties at the following addresses (or at such other address for a Party as shall be specified by like notice; provided, that notices of a change of address shall be effective only upon receipt thereof): If to Allergan, addressed to: Allergan, Inc. 2525 Dupont Drive Irvine, CA 92715-1599 Attn: Corporate Vice President, General Counsel With copy to: Corporate Vice President, Science and Technology fax: (714) 246-4774 If to Ligand or ALRT, addressed to: Ligand Pharmaceuticals Incorporated 9393 Towne Centre Drive San Diego, CA 92121 Attn: Senior Vice President, General Counsel, Government Affairs With copy to: President fax: (619) 625-4521 14.6 GOVERNING LAW. This Agreement shall be governed by the laws of the State of California, as such laws are applied to contracts entered into and to be performed within such state. Subject to Section 14.15, any claim or controversy arising out of or related to this contract or any breach hereof shall be submitted to a court of competent jurisdiction in the State of California, and the Parties hereby consent to the jurisdiction and venue of such court. In the event of any proceeding to enforce the provisions of this Agreement, the prevailing Party shall be entitled to reasonable attorneys' fees and legal costs. 14.7 WAIVER. Except as specifically provided for herein, the waiver from time to time by a Party of any of its rights or its failure to exercise any remedy shall not operate or be construed as a continuing waiver of same or of any other of such Party's rights or remedies provided in this Agreement. 14.8 SEVERABILITY. If any term, covenant or condition of this Agreement or the application thereof to any Party or circumstance shall, to any extent, be held to be invalid or unenforceable, then (i) the remainder of this Agreement, or the application of such term, covenant or condition to parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Agreement shall be valid and be enforced to the fullest extent permitted by law; and (ii) the Parties hereto covenant and agree to renegotiate any such term, covenant or application thereof in good faith in order to provide a reasonably acceptable alternative to the term, covenant or -29- 35 condition of this Agreement or the application thereof that is invalid or unenforceable, it being the intent of the Parties that the basic purposes of this Agreement are to be effectuated. 14.9 HEADINGS; AMBIGUITIES. The section and paragraph headings contained herein are for the purposes of convenience only and are not intended to define or limit the content of said sections or paragraphs. Ambiguities, if any, in this Agreement shall not be construed against a Party, irrespective of which Party may be deemed to have authorized the ambiguous provision. 14.10 ENTIRE AGREEMENT; AMENDMENT. This Agreement (including all exhibits attached hereto), with the Transition Plan, the Mutual General Release and the Program Agreements, sets forth all the covenants, promises, agreements, warranties, representations, conditions and understandings between the Parties hereto with respect to the subject matter hereof, and supersedes and terminates all prior agreements and understandings between the Parties. There are no covenants, promises, agreements, warranties, representations, conditions or understandings, either oral or written, between the Parties other than as set forth herein and therein. Without limiting the foregoing, effective as of the Effective Date, the Joint Agreements shall be terminated and of no further force or effect. No subsequent alteration, amendment, change or addition to this Agreement shall be binding upon the Parties hereto unless reduced to writing and signed by the respective authorized officers of the Parties. 14.11 MUTUAL RELEASES. On the Closing Date, the Parties have executed and delivered a Mutual General Release in the form attached hereto as Exhibit I. 14.12 RELATIONSHIP OF THE PARTIES. Nothing contained in this Agreement is intended or is to be construed to constitute Allergan, Ligand or ALRT as partners or joint venturers. Except as expressly provided herein (or, with respect to Ligand and ALRT, as permitted by law), no Party hereto shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of the other Party or to bind any other Party to any contract, agreement or undertaking with any Third Party. 14.13 SUCCESSORS AND ASSIGNS. Any Party may assign its rights or obligations under this Agreement to any other Person without the prior written consent of the other Party; provided, however, that no such assignment shall relieve any Party of its obligations to another Party under this Agreement. Subject to the foregoing, any reference to Allergan, Ligand or ALRT hereunder shall be deemed to include the successors thereto and assigns hereof. 14.14 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, and all of which counterparts, taken together, shall constitute one and the same instrument. As provided in the Transition Plan, this Agreement shall initially constitute an agreement between Allergan and Ligand. Upon the Closing Date, Ligand and Allergan shall take all actions necessary to cause ALRT to execute and deliver this Agreement, and ALRT shall thereupon become a party hereto. 14.15 DISPUTE RESOLUTION. In an effort to resolve informally and amicably any claim, controversy, or dispute arising out of or related to the interpretation, performance, or breach of -30- 36 this Agreement or the Transition Plan (a "Dispute") without commencing formal legal action, each Party shall notify each other Party to the Dispute in writing of any Dispute hereunder that requires resolution. Such notice shall set forth the nature of the Dispute, the amount involved, if any, and the remedy sought. Each Party to such Dispute shall designate an employee to investigate, discuss and seek to settle the matter between them. If such employees are unable to settle the matter within *** after delivery of such notification, the matter shall be submitted to the Chief Executive Officers of each of the Parties involved in such Dispute for consideration. If settlement cannot be reached through their efforts within an additional *** (or such longer time period as they shall agree upon in writing) then any Party may thereafter take such actions as it deems appropriate. During such *** (or longer period as agreed in writing), the Chief Executive Officers shall meet no less than once face-to-face. The Parties agree that any applicable statute of limitations shall be tolled during the pendency of such informal dispute resolution process and that no Party shall raise or assert any claim of laches or other legal or equitable principle of limitation or repose of action based upon such process. The Parties agree that in no event shall any of them be subject to the awarding of any punitive or exemplary damages in any legal action arising out of or related to this Agreement or the Transition Plan. [Remainder of This Page Intentionally Left Blank] -31- *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 37 IN WITNESS WHEREOF the Parties have executed this Agreement as of the date first above written. ALLERGAN, INC. By /s/ William C. Shepherd -------------------------------------------------- William C. Shepherd Chairman and Chief Executive Officer LIGAND PHARMACEUTICALS INCORPORATED By /s/ David E. Robinson -------------------------------------------------- David E. Robinson President and Chief Executive Officer ALLERGAN LIGAND RETINOID THERAPEUTICS, INC. By /s/ David E. Robinson -------------------------------------------------- David E. Robinson President -32- 38 Exhibit A Ligand Exercise Notice 39 [LOGO] LIGAND Pharmaceuticals September 24, 1997 Allergan, Inc. 2525 Dupont Drive Irvine, CA 92715-1599 Attn: Corporate Vice President, General Counsel Allergan Ligand Retinoid Therapeutics, Inc. 9393 Towne Centre Drive San Diego, CA 92121 Attn: Secretary Re: Notice of Exercise of Stock Purchase Option Dear Sirs: This letter will serve as notice, pursuant to Article V of the Amended and Restated Certificate of Incorporation of Allergan Ligand Retinoid Therapeutics, Inc. (ALRT), of Ligand's election to exercise its Stock Purchase Option pursuant to said Amended and Restated Certificate of Incorporation of ALRT. Attached hereto is a copy of the notice to ALRT shareholders, along with accompanying cover letter and transmittal, being mailed on even date herewith. Very Truly Yours, /s/ David E. Robinson David E. Robinson Chairman, President and CEO Ligand Pharmaceuticals Incorporated Attachment cc: Faye H. Russell, Esq. Thomas A. Coll, Esq. Mary Rosenthale 40 [LOGO] LIGAND Pharmaceuticals LIGAND PHARMACEUTICALS INCORPORATED 9393 Towne Center Drive San Diego, California 92121 September 24, 1997 To the Holders of Callable Common Stock of Allergan Ligand Retinoid Therapeutics, Inc.: Ligand Pharmaceuticals Incorporated ("Ligand") has exercised its Stock Purchase Option, granted to it under the Amended and Restated Certificate of Incorporation of Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT"), to purchase all of the issued and outstanding shares of Callable Common Stock, $.001 par value per share, of ALRT (the "Callable Common Stock") at an exercise price of $21.97 (the "Exercise Price") for each outstanding share of Callable Common Stock. Upon surrender of your certificates representing shares of Callable Common Stock in accordance with the instructions referred to herein, payment shall be made with a combination of cash and shares of Ligand Common Stock, or at Ligand's option, all cash. Enclosed is a formal Notice of Exercise and a Letter of Transmittal to use in surrendering the certificates representing your shares of Callable Common Stock for payment in the form of cash and certificates representing shares of Ligand Common Stock. The Letter of Transmittal contains instructions that you should read and follow carefully. Please make sure it is properly completed, signed and dated. Your shares of Callable Common Stock were issued as part of a Unit comprised of one share of Callable Common Stock and a Warrant to purchase two shares of Ligand Common Stock. Please separate the certificate(s) representing the shares of Callable Common Stock from the certificate(s) representing the Warrant(s) if this has not been previously done. You may submit your certificates representing shares of Callable Common Stock and your Letter of Transmittal either by mail or by hand at the addresses set forth in the Letter of Transmittal. The method of delivery of stock certificates is at your option and risk. If sent by mail, it is strongly recommended that certificates be sent by registered mail, properly insured, with return receipt requested. If you have any questions regarding how to surrender your stock certificates for payment, or if you need additional copies of the Letter of Transmittal, please contact the Payment Agent, ChaseMellon Shareholder Services, L.L.C., at 888-216-8061. Questions related to Notice of Exercise should be directed to Ligand Investor Relations request line 619-550-7700. Sincerely, /s/ David E. Robinson David E. Robinson President and Chief Executive Officer LIGAND PHARMACEUTICALS INC. 9393 Towne Centre Drive, San Diego, CA 92121 (619) 535-3900 fax (619) 535-3906 41 NOTICE OF EXERCISE OF STOCK PURCHASE OPTION This Notice of Exercise of Stock Purchase Option shall constitute notice of the intent of Ligand Pharmaceuticals Incorporated ("Ligand") to exercise the Stock Purchase Option (as defined in Article V of the Amended and Restated Certificate of Incorporation of Allergan Ligand Retinoid Therapeutics, Inc. (the "Certificate")). Defined terms not otherwise defined herein shall have the meanings given them in the Certificate. 1. The Stock Purchase Option Exercise Price, as determined pursuant to Section 5.2 of the Certificate, shall be $21.97 per share of outstanding Callable Common Stock, for an aggregate Stock Purchase Option Exercise Price of $71,402,500. 2. 35 percent, or $7.69 of the Stock Purchase Option Exercise Price, shall be paid in cash. 3. 65 percent, or $14.28 of the Stock Purchase Option Exercise Price, shall be paid in shares of Ligand Common Stock. 4. -0- percent, or $ -0- of the Stock Purchase Option Exercise Price, shall be paid in shares of Allergan Common Stock. 5. Notwithstanding the foregoing, and in accordance with the terms of Article V of the Certificate of Incorporation, Ligand reserves the right to make payment of a greater amount of the Stock Purchase Option Exercise Price in cash than set forth herein. 6. The Record Date shall be October 14, 1997. 7. The Stock Purchase Closing Date shall be November 3, 1997, or such other date as permitted under the last sentence of Section 5.6 of the Certificate. 8. Holders of shares of Callable Common Stock may obtain payment of the Stock Purchase Option Exercise Price for their shares of Callable Common Stock from the Payment Agent, as set forth on Exhibit A attached to this Notice. 9. Questions related to this Notice of Exercise should be directed to Ligand Investor Relations request line 619-550-7700. Payment Agent will assist you regarding the completion of Letter of Transmittal, if necessary. A registration statement relating to the shares of Ligand Common Stock to be issued on the Stock Purchase Closing Date will be filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers be accepted prior to the time the registration statement becomes effective. This Notice of Exercise of Stock Purchase Option shall not constitute an offer to sell nor the solicitation of an offer to buy nor shall there by any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. Dated: September 24, 1997 /s/ David E. Robinson ---------------------------------------- David E. Robinson, President Ligand Pharmaceuticals Incorporated 42 LETTER OF TRANSMITTAL TO ACCOMPANY SHARES OF ALLERGAN LIGAND RETINOID THERAPEUTICS, INC. CALLABLE COMMON STOCK, PAR VALUE $.001 PER SHARE
- ------------------------------------------------------------------------------------------------------------------------------------ DESCRIPTION OF SHARES SURRENDERED - ------------------------------------------------------------------------------------------------------------------------------------ If there is any error in this name and Registration address shown below, please make the necessary corrections Certificate No(s) Number of Shares - ------------------------------------------------------------------------------------------------------------------------------------ -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- Total - ------------------------------------------------------------------------------------------------------------------------------------
NOTE: If your certificate(s) has been lost, stolen, misplaced or mutilated, contact the Payment Agent at 1-888-216-8061. See Instruction 5. Please issue my new certificate and/or check in the name shown above and deliver such check to the address reflected above unless instructions are given in the boxes below: Mail or deliver this Letter of Transmittal, or a facsimile, together with the certificate(s) representing your shares to ChaseMellon Shareholder Services, L.L.C., the Payment Agent, at one of the following addresses. Your stock and/or cash entitlement is described in the accompanying notice. ChaseMellon Shareholder Services, L.L.C. BY HAND BY MAIL BY OVERNIGHT DELIVERY 120 Broadway, 13th Fl. Post Office Box 3305 85 Challenger Road - Mail Drop-Reorg New York, NY 10271 South Hackensack, NJ 07606 Ridgefield Park, NY 07660 ATTN: Reorganization Department Attn: Reorganization Department Attn: Reorganization Department TELEPHONE 1-888-216-8061
SPECIAL ISSUANCE INSTRUCTIONS (See Instruction 4 on the reverse hereof) Complete only if new certificate and/or check is to be issued in a name which differs from the name on the surrendered certificate(s). Name ------------------------------------------------------------------------ Address ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- (Please also complete Substitute Form W-9 on the reverse AND see instructions regarding signature guarantee.) - -------------------------------------------------------------------------------- SIGNATURE(S) REQUIRED (Signature(s) of Registered Holder(s) or Agent) Must be signed by the registered holder(s) EXACTLY as name(s) appear(s) on Unless shares are surrendered by the registered holder(s) or for the account of a member stock certificate(s) or on a security position listing. If signature is by a trustee, of a "Signature Guarantee Program ("STAMP"), Stock Exchange Medallion Program executor, administrator, guardian, attorney-in-fact, officer of a corporation acting in ("SEMP") or New York Stock Exchange Medallion Signature Program ("MSP") (an a fiduciary or representative capacity, or other person please set forth full title. See "Eligible Institution") signature(s) must be guaranteed by an Eligible Institution. See Instructions 2, 3 and 4. Instruction 3. - -------------------------------------------------------------------------------- Registered Holder - -------------------------------------------------------------------------------- Registered Holder - -------------------------------------------------------------------------------- Title, if any - -------------------------------------------------------------------------------- Date: Phone No.: - ----------------------------- ------------------------ SPECIAL DELIVERY INSTRUCTIONS (See Instruction 4 on the reverse hereof) Complete only if new certificate and/or check is to be mailed to some address other than the address reflected above. Name ------------------------------------------------------------------------ Address ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- SIGNATURE(S) GUARANTEED (IF REQUIRED) Unless shares are surrendered by the registered holder(s) or for the account of a member of a "Signature Guarantee Program ("STAMP"), Stock Exchange Medallion Program ("SEMP") or New York Stock Exchange Medallion Signature Program ("MSP") (an "Eligible Institution") signature(s) must be guaranteed by an Eligible Institution. See Instruction 3. - -------------------------------------------------------------------------------- (Authorized Signature) - -------------------------------------------------------------------------------- (Name of Firm) - -------------------------------------------------------------------------------- (Address of Firm - Please Print) NOTE: YOU MUST COMPLETE THE SUBSTITUTE FORM W-9 ON THE REVERSE HEREOF. 43 INSTRUCTIONS FOR SURRENDERING CERTIFICATES 1. Method of Delivery: Your old certificate(s) and the Letter of Transmittal must be sent or delivered to the Payment Agent. The method of delivery of Certificates to be surrendered to the Payment Agent at one of the addresses set forth on the front of the Letter of Transmittal is at the option and risk of the surrendering stockholder. Delivery will be deemed effective only when received. If the certificate(s) are sent by mail, registered mail with return receipt requested, properly insured, is suggested. A return envelope is enclosed. 2. New Certificate and/or check is issued to registered holder. If the new certificate and/or check is issued in the same name as the surrendered certificate is registered, the Letter of Transmittal should be completed and signed exactly as the surrendered certificate is registered. Do not sign the Certificate(s). If any Certificate surrendered hereby is owned by two or more joint owners, all such owners must sign this Letter of Transmittal exactly as written on the face of the certificate(s). If any shares are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are different registrations. 3. New Certificate and/or check is issued to another person. Except as otherwise provided below, signatures on this Letter of Transmittal must be guaranteed by a firm that is a bank, broker, dealer, credit union, savings association or other entity which is a member in good standing of the Securities Transfer Agents' Medallion Program (each an "Eligible Institution"). Signature guarantees are not required if the certificate(s) surrendered herewith are submitted by the registered owner of such shares who has not completed the section entitled "Special Issuance Instructions" or for the account of an Eligible Institution. If the surrendered certificates are registered in the name of a person other than the signer of this Letter of Transmittal, or if issuance is to be made to a person other than the signer of this Letter of Transmittal, or if the issuance is to be made to a person other than the registered owner or owners, then the surrendered certificates must be endorsed or accompanied by duly executed stock powers, in either case signed exactly as the name or names of the registered owner or owners appear on such certificates or stock powers, with the signatures on the certificates or stock powers guaranteed by an Eligible Institution as provided herein. 4. Special Issuance and Delivery Instructions: Indicate the name and address to which the new certificate and/or checks to be sent if different from the name and/or address of the person(s) signing this Letter of Transmittal. 5. Letter of Transmittal Required, Surrender of Certificate(s), Lost Certificate(s): You will not receive your new certificate and/or check unless and until you deliver this Letter of Transmittal, properly completed and duly executed, to the Payment Agent, together with the certificate(s) evidencing your shares and any required accompanying evidences of authority. If your certificates have been lost, stolen, misplaced or mutilated, contact the Payment Agent for instructions at 1-888- 216-8061 prior to submitting your certificates for exchange. 6. Substitute Form W-9. Each stockholder who surrenders one or more certificates is required to provide the Payment Agent with such stockholder's correct Taxpayer Identification Number ("TIN") on Substitute Form W-9, which is attached. Failure to provide the information on the form may subject the surrendering stockholders to 31% federal income tax withholding on the payment of any cash consideration due for the former shares evidenced by the certificate(s) surrendered. The words "Applied For" should be written in the space for the TIN in Part III of the form if the surrendering stockholder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future. If the words "Applied For" are written in Part III and the Payment Agent is not provided with a TIN within 60 days, the Payment Agent will withhold 31% on all payments to such surrendering stockholders of any cash consideration due for their former shares until a TIN is provided to the Payment Agent. IMPORTANT TAX INFORMATION What Taxpayer Identification Number to Give the Payment Agent The registered holder or transferee(s), if any, is required to give the Payment Agent the social security number or employer identification number of the registered holder of the certificate(s). If the certificate(s) are in more than one name or are in the name of the actual owner, consult the enclosed Form W-9 guidelines for additional guidance on which number to report. PAYER'S NAME: CHASEMELLON SHAREHOLDER SERVICES, L.L.C. - ------------------------------------------------------------------------------------------------------------------------------------ SUBSTITUTE Part 1 - PLEASE PROVIDE YOUR TIN IN THE BOX AT Part III - Social Security Number OR RIGHT AND CERTIFY BY SIGNING AND DATING BELOW Employer Identification Number Form W-9 Department of the Treasury Internal Revenue Service __________________________________________ (If awaiting TIN write "Applied For") Payer's Request for Taxpayer Identification Number (TIN) and Certification ---------------------------------------------------------------------------------------------- Payer's Request for Taxpayer Part II - For Payees exempt from backup withholding, see the enclosed Guidelines Identification Number (TIN) for Certification of Taxpayer Identification Number on Substitute Form W-9 and complete as and Certification instructed therein. - ------------------------------------------------------------------------------------------------------------------------------------ Certification -- Under penalties of perjury, I certify that: (1) The Number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me); and (2) I am not subject to backup withholding either because I have not been notified by the Internal Revenue Service (IRS) that I am subject to backup withholding as a result of failure to report all interest or dividends, or the IRS has notified me that I am no longer subject to backup withholding. Certification Instructions - You must cross out item (2) above if you have been notified by the IRS that you are subject to backup withholding because of underreporting interest or dividends on your tax return. However, if after being notified by the IRS that you were subject to backup withholding, you received another notification from the IRS that you were no longer subject to backup withholding, do not cross out item (2). (Also see instructions on the enclosed Guidelines) - ------------------------------------------------------------------------------------------------------------------------------------ SIGNATURE DATE --------------------------------------- --------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU ARE AWAITING YOUR TIN. 44 CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a TIN has not been issued to me, and either (1) I have mailed or delivered an application to receive a TIN to the appropriate IRS Center or Social Security Administration Office or (2) I intend to mail or deliver an application in the near future. I understand that if I do not provide a TIN by the time of payment, 31% of all payments made to me thereafter will be withheld until I provide a number. ____________________________________ _________________________ Signature Date 45 Exhibit B Allergan Exercise Notice 46 ALLERGAN [LOGO] 2525 Dupont Drive, P.O. Box 19534, Irvine CA 92623-9534 (714) 752-4500 William C. Shepherd, Chairman and Chief Executive Officer Direct: (714) 246-4601 FAX: (714) 246-5918 September 24, 1997 Ligand Pharmaceuticals Incorporated VIA PERSONAL DELIVERY 9393 Towne Centre Drive San Diego, CA 92121 Attention: Senior Vice President, General Counsel, Government Affairs Allergan Ligand Retinoid Therapeutics, Inc. 9393 Towne Centre Drive San Diego, CA 92121 Attention: Secretary Re: Asset Purchase Option Agreement Notice of Exercise of Asset Purchase Option Dear Sirs: This letter shall serve as notice, pursuant to Section 1.5 of the Asset Purchase Option Agreement by and among Ligand Pharmaceuticals Incorporated, Allergan, Inc. ("Allergan") and Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT") dated June 3, 1995 (the "Agreement"), of Allergan's election to exercise the Asset Purchase Option pursuant to Section 1.5 of the Agreement. Capitalized terms not otherwise defined herein shall have the meanings given to them in the Agreement. As determined in accordance with Section 1.3 of the Agreement, the Asset Purchase Option Exercise Price is $8,900,000, all of which, in accordance with Section 1.4 of the Agreement, will be paid to ALRT in cash via wire transfer at the Asset Purchase Closing. Very truly yours, ALLERGAN, INC. /s/ William C. Shepherd William C. Shepherd Chairman, President and Chief Executive Officer cc: Ligand Pharmaceuticals Incorporated Attention: President Faye H. Russell, Esq. Thomas A. Coll, Esq. 47 Exhibit C Compound 268 * * * *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 48 Exhibit D Compound 324 * * * *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 49 Exhibit E Compound 1057 LIGAND Name: * * * IUPAC Name: * * * Common name: * * * CAS Number: * * * *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 50 Exhibit F Compound 1069 LIGAND Name: * * * Chemical Name: * * * *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 51 Exhibit G Allergan Selected Compounds AGN 4310: * * * ALRT 4204: * * * INCLUDING: ALRT 4277: Enantiomer of ALRT 4204 ALRT 2599: Racemic Mixture; ALRT 4204 + ALRT 4277 ALRT 326: * * * *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 52 Exhibit H Ligand Selected Compounds LGD 268: See Exhibit C LGD 324: See Exhibit D LGD: 1057: See Exhibit E AGN: 1550: * * * *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 53 Exhibit I Mutual General Release 54 MUTUAL GENERAL RELEASE THIS MUTUAL GENERAL RELEASE (the "Release") is being executed and delivered as of ________________, 1997 by and among ALLERGAN, INC., a Delaware corporation having offices at 2525 Dupont Drive, Irvine, California 92715-1599 ("Allergan"), LIGAND PHARMACEUTICALS INCORPORATED, a Delaware corporation having offices at 9393 Towne Centre Drive, San Diego, California 92121 ("Ligand"), and ALLERGAN LIGAND RETINOID THERAPEUTICS, INC., a Delaware corporation having offices at 9393 Towne Centre Drive, San Diego, California 92121 ("ALRT"). Terms used herein but not defined herein shall have the meanings given such terms in the Amended and Restated Technology Cross License Agreement dated September __, 1997 (the "License Agreement"). RECITALS WHEREAS, (i) Allergan, Ligand and ALRT are Parties to the License Agreement and the Transition Agreement dated September ___, 1997 (the "Transition Agreement"), (ii) Allergan, Ligand and ALRT are Parties to the Program Agreements, (iii) Allergan and Ligand have entered into the Joint Agreements between themselves, (iv) pursuant to the Stock Purchase Option, Ligand has delivered irrevocable notice of its election to acquire all of the outstanding Callable Common Stock of ALRT in accordance with the terms thereof and (v) pursuant to the Asset Purchase Option, Allergan has delivered irrevocable notice of its election to acquire from ALRT the Purchased Assets in accordance with the terms thereof; and WHEREAS, under Section 14.11 of the License Agreement, the Parties have agreed to execute and deliver this Release. AGREEMENT The Parties acknowledge that, in order to induce each other to consummate the transactions contemplated by the License Agreement and the Transition Agreement, respectively, the Parties hereby for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged and intending to be legally bound, covenant and agree as follows: 1. RELEASE. Each Party to this Release, when executed by all other Parties, for itself and for each of such Party's Associated Parties (as defined in Section 2), hereby generally, irrevocably, unconditionally and completely releases, acquits and forever discharges each of the Releasees (as defined in Section 2) from, and hereby irrevocably, unconditionally and completely waives and relinquishes, each of the Released Claims (as defined in Section 2). 2. DEFINITIONS. (a) "Associated Party" when used herein with respect to a Party, shall mean and include: (i) such Party's past, present and future assigns, agents and representatives; (ii) each entity that such Party has the power to bind (by such Party's acts or signature) or over which such Party directly or indirectly exercises control; and (iii) each entity of which such Party owns, 55 directly or indirectly, at least 50% of the outstanding equity, beneficial, proprietary, ownership or voting interests. (b) "Releasees" shall mean and include Allergan, Ligand and ALRT and their respective successors, and past, present and future assigns, directors, officers, partners, employees, agents, attorneys and representatives. (c) "Claims" shall mean and include all past, present and future disputes, claims, damages, controversies, demands, rights, obligations, liabilities, actions and causes of action of every kind and nature, in equity or otherwise, whether known, unknown, suspected, unsuspected, disclosed or undisclosed. (d) "Released Claims" shall mean and include each and every Claim that a Party or any Associated Party of such Party may have had in the past, may now have or may have in the future against any of the Releasees, and that has arisen or arises directly or indirectly out of, or relates directly or indirectly to, any circumstance, agreement, activity, action, omission, event or matter occurring or existing on or prior to the date of this Release and which arises out of or relates to the Program Agreements or any other prior association among Allergan, Ligand and/or ALRT (excluding only such Party's continuing rights as expressly set forth in the Program Agreements and in any event excluding such Party's rights under the License Agreement, the Transition Agreement and any agreement executed and delivered in connection with the License Agreement and/or the Transition Agreement). 3. REPRESENTATIONS AND WARRANTIES. Each Party represents and warrants that as of the Closing Date: (a) such Party has not assigned, transferred, conveyed or otherwise disposed of any Claim against any of the Releasees, or any direct or indirect interest in any such Claim, in whole or in part; (b) to the best of such Party's knowledge, no other person or entity has any interest in any of the Released Claims; (c) no Associated Party of such Party has or has had any Claim against any of the Releasees; (d) no Associated Party of such Party will in the future have any Claim against any Releasee that arises directly or indirectly from or relates directly or indirectly to any circumstance, activity, action, omission, event or matter occurring or existing on or before the date of this Release; (e) this Release has been duly and validly executed and delivered by such Party; -2- 56 (f) this Release is a valid and binding obligation of such Party and such Party's Associated Parties, and is enforceable against such Party and each of such Party's Associated Parties in accordance with its terms; (g) there is no action, suit, proceeding, dispute, litigation, claim, complaint or investigation by or before any court, tribunal, governmental body, governmental agency or arbitrator pending, or to the best knowledge of such Party, threatened against such Party or any of such Party's Associated Parties that challenges or would challenge the execution and delivery of this Release or the taking of any of the actions required to be taken by such Party under this Release; (h) neither the execution and delivery of this Release nor the performance hereof will (i) result in any violation or breach of any agreement or other instrument to which such Party or any of such Party's Associated Parties is bound, or (ii) result in a violation or any law, rule, regulation, treaty, ruling, directive, order, arbitration award, judgment or decree to which such Party or any of such Party's Associated Parties is subject; and (i) no authorization, instruction, consent or approval of any person or entity is required to be obtained by such Party or any of such Party's Associated Parties in connection with the execution and delivery of this Release or the performance hereof. 4. CIVIL CODE SECTION 1542. Each Party represents, warrants and agrees that it has been fully advised by its attorney of the contents of Section 1542 of the Civil Code of the State if California. Each party expressly waives and relinquishes all rights and benefits under that section and any similar law or common law principle of similar effect of any state or territory of the United States with respect to the Released Claims. Section 1542 reads as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially effected his settlement with the debtor." 5. INDEMNIFICATION. Without in any way limiting any of the rights or remedies otherwise available to any Releasee, each Party shall, severally not jointly, indemnify, defend and hold harmless each Releasee against and from any loss, damage, injury, harm, detriment, lost opportunity, liability, exposure, claim, demand, settlement, judgment, award, fine, penalty, tax, fee, charge or expense (including reasonable attorneys' fees) that is directly or indirectly suffered or incurred at any time by such Releasee, or to which such Releasee otherwise becomes subject at any time, and that arises directly or indirectly out of or by virtue of, or relates directly or indirectly to, (a) any failure on the part of such Party to observe, perform or abide by, or any other breach of, any restriction, covenant, obligation, representation, warranty or other provision contained herein, or (b) the assertion or purported assertion of any of the Released Claims by such Party or any of such Party's Associated Parties. -3- 57 6. MISCELLANEOUS. (a) This Release sets forth the entire understanding of the Parties relating to the subject matter hereof and supersedes all prior agreements and understandings among or between the Parties relating to the subject matter hereof. (b) Each party represents and warrants that such Party is not relying on any representation or warranty of any Party other than those contained herein in the execution and delivery of this Release. (c) If any provision of this Release or any part of any such provision is held under any circumstances to be invalid or unenforceable in any jurisdiction, then (i) such provision or part thereof shall, with respect to such circumstances and in such jurisdiction, be deemed amended to conform to applicable laws so as to be valid and enforceable to the fullest possible extent, (ii) the invalidity or unenforceability of such provision or part thereof under such circumstances and in such jurisdiction shall not affect the validity or enforceability of such provision or part thereof under any other circumstances or in any other jurisdiction, and (iii) such invalidity or unenforceability of such provision or part thereof shall not affect the validity or enforceability of the remainder of such provision or the validity or enforceability of any other provision of this Release. If any provision of this Release or any part of such provision is held to be unenforceable against a Party, then the unenforceability of such provision or any part thereof against such Party shall not affect the enforceability thereof against any other Party. Each provision of this Release is separable from every other provision of this Release, and each part of each provision of this Release is separable from every other part of such provision. (d) This Release shall be construed in accordance with, and governed in all respects by, the laws of the State of California (without giving effect to principles of conflicts of laws). (e) Any legal action or other legal proceeding relating to this Release or the enforcement of any provision of this Release may be brought or otherwise commenced by any Releasee in any state or federal court located in *** County in the State of California. Each Party expressly and irrevocably consents and submits to the jurisdiction of each state and federal court located in *** County in the State of California in connection with any such legal proceeding. Each Party agrees that any such state and federal courts located in such counties in the State of California shall be deemed to be a convenient forum. Each Party agrees not to assert (by way of motion, as a defense or otherwise), in any such legal proceeding commenced in any such state or federal court, any claim that such Party is not subject personally to the jurisdiction of such court, that such legal proceeding has been brought in an inconvenient forum, that the venue of such proceeding is improper or that this Release or the subject matter of this Release may not be enforced in or by such court. Nothing contained in this Release shall be deemed to limit or otherwise affect the right of any Releasee (1) to commence any legal proceeding or to otherwise proceed against a *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -4- 58 Party or any other person or entity in any other forum or jurisdiction, or (2) to raise this Release as a defense in any legal proceeding in any other forum or jurisdiction. (f) Each Party shall execute and/or cause to be delivered to each Releasee such instruments and other documents, and shall take such other actions, as such Releasee may reasonably request for the purpose of carrying out or evidencing any of the actions contemplated by this Release. (g) This Release shall be interpreted and construed mutually in accordance with the plain meaning of the language contained herein and shall not be preemptively construed against the drafters. (h) If any legal action or other legal proceeding relating to this Release or the enforcement of any provision hereof is brought by a Party, the prevailing Party shall be entitled to recover reasonable attorneys' fees, costs and disbursements to the extent actually incurred (in addition to any other relief to which the prevailing Party may be entitled). IN WITNESS WHEREOF the Parties have executed this Release as of the date first above written. ALLERGAN, INC. By___________________________________ _____________________________________ [TITLE] LIGAND PHARMACEUTICALS INCORPORATED By___________________________________ _____________________________________ David E. Robinson President and Chief Executive Officer ALLERGAN LIGAND RETINOID THERAPEUTICS, INC. By___________________________________ _____________________________________ 59 Exhibit J Database Information 60 [LOGO] PHARMACEUTICAL R & D RETINOID TEAM INTEROFFICE MEMORANDUM TO: Les Kaplan FROM: Rosh Chandraratna RE: EXHIBIT J: Database information DATE: September 19, 1997 FROM LIGAND * * * * * * * * * *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 61 Memorandum September 19, 1997 Page 2 FROM ALLERGAN: * * * * * * * * * *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 62 EXHIBIT K LIST OF LOTTERY COMPOUNDS BY CATEGORY REFERENCE IS MADE TO THAT CERTAIN LETTER DATED SEPTEMBER 19, 1997 FROM *** *** *** *** . FOR PURPOSES OF THIS AMENDED AND RESTATED TECHNOLOGY CROSS LICENSE AGREEMENT ("AGREEMENT"), THE LOTTERY COMPOUNDS REFERENCED IN SECTION 3.1(B) OF THE AGREEMENT AS BEING IN EXISTENCE ON THE DATE HEREOF AND LISTED ON EXHIBIT K SHALL BE DEEMED TO INCLUDE THE PROGRAM COMPOUNDS SET FORTH ON THE LISTS DELIVERED UNDER COVER OF THE LETTERS. THE PARTIES ACKNOWLEDGE AND AGREE THAT (I) THAT SUCH LISTS MAY NOT CONTAIN A FULL LISTING OF ALL PROGRAM COMPOUNDS IN EXISTENCE AS OF THE DATE HEREOF, (II) SUCH LISTS MAY CONTAIN MORE THAN ONE REFERENCE TO THE SAME PROGRAM COMPOUND, (III) ALLERGAN AND LIGAND HAVE NOT YET AGREED UPON THE CLASSIFICATION OF SUCH PROGRAM COMPOUNDS INTO EACH OF THE RESPECTIVE CATEGORIES PROVIDED FOR IN THE AGREEMENT AND (IV) ALLERGAN AND LIGAND SHALL DILIGENTLY WORK TO FINALIZE THE LIST OF LOTTERY COMPOUNDS AND CLASSIFY SUCH FINAL LIST INTO THE CATEGORIES SPECIFIED IN THE AGREEMENT AS SOON AS PRACTICABLE BUT NOT LATER THAN TEN (10) DAYS PRIOR TO THE MUTUALLY AGREED UPON DATE OF THE LOTTERY IN ACCORDANCE WITH THE AGREEMENT. SUCH FINAL LIST WITH LOTTERY COMPOUNDS ORGANIZED BY CATEGORY SHALL BE ATTACHED TO THIS EXHIBIT K ON OR PRIOR TO THE CLOSING DATE. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 63 EXHIBIT L CERTAIN THIRD PARTY AGREEMENTS 1. Salk Institute License Agreement with Ligand Pharmaceuticals Incorporated of October 20, 1988, as amended on September 15, 1989, December 1, 1989 and October 20, 1990; and agreements covering the transfer of biological reagents of September 15, 1989, February 9, 1990, June 8, 1990 and November 14, 1990. 2. Baylor College of Medicine Sponsored Research and License Agreement with Ligand Pharmaceuticals Incorporated of March 9, 1992, as amended on September 1, 1992. 3. Baylor College of Medicine License Agreement with Ligand Pharmaceuticals Incorporated to 9-cis retinoc acid technology and patents, of August 25, 1995. 4. Institut Pasteur Exclusive License Agreement with Ligand Pharmaceuticals Incorporated of October 1, 1989. 5. HSC Research and Development Limited Partnership and Mount Sinai Hospital Exclusive License Agreement with Ligand Pharmaceuticals Incorporate of January 27, 1992. 6. Settlement Agreement, License and Mutual General Release of August 23, 1995 between La Jolla Center Research Foundation (now the Burnham Institute), SelectRA Pharmaceuticals, Inc. and SRI International (collectively, "Defendants") and Ligand Pharmaceuticals Incorporated, Allergan Ligand, a California partnership (collectively, "Plaintiffs") and Allergan Ligand Retinoid Therapeutics, Inc. EX-10.166 3 EXHIBIT 10.166 1 EXHIBIT 10.166 TRANSITION AGREEMENT This TRANSITION AGREEMENT ("Agreement") is entered into as of the 24th day of September, 1997 among ALLERGAN, INC., a Delaware corporation having offices at 2525 Dupont Drive, Irvine, California 92715-1599 ("Allergan"), LIGAND PHARMACEUTICALS INCORPORATED, a Delaware corporation having offices at 9393 Towne Centre Drive, San Diego, California 92121 ("Ligand"), and ALLERGAN LIGAND RETINOID THERAPEUTICS, INC., a Delaware corporation having offices at 9393 Towne Centre Drive, San Diego, California 92121 ("ALRT"). A. (i) Allergan, Ligand and ALRT are Parties to the Amended and Restated Technology Cross License Agreement of even date herewith (the "License Agreement"), (ii) Allergan, Ligand and ALRT are Parties to the Program Agreements, (iii) Allergan and Ligand have entered into the Joint Agreements between themselves, (iv) pursuant to the Stock Purchase Option, Ligand will deliver, within two (2) business days, irrevocable notice of its election to acquire all of the outstanding Callable Common Stock of ALRT in accordance with the terms of the Stock Purchase Option pursuant to the Ligand exercise notice in the form attached to the License Agreement as Exhibit A and (v) pursuant to the Asset Purchase Option, Allergan will deliver, within two (2) business days, notice of its election to acquire from ALRT the Purchased Assets (as defined in Section 1.1 of that certain Asset Purchase Option Agreement dated June 3, 1995 among Allergan, Ligand and ALRT) in accordance with the terms of the Asset Purchase Option pursuant to the Allergan exercise notice in the form attached to the License Agreement as Exhibit B. B. The Parties desire to enter into this Agreement to provide for, among other things, the transition prior to and following the Effective Date of research and development being conducted with respect to Selected Compounds and other costs incurred by or on behalf of ALRT. C. On or prior to the date hereof, Ligand has, or within two (2) days following the date hereof Ligand will have, prepared and filed with the Securities and Exchange Commission ("SEC") a Registration Statement with respect to the issuance of any shares of Ligand Common Stock being issued in payment of the Stock Purchase Option Exercise Price in accordance with Sections 5.3 and 5.6 of ALRT's Amended and Restated Certificate of Incorporation (the "Restated Certificate"). NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Allergan, Ligand and ALRT hereby agree as follows: 1 2 1. DEFINITIONS. Terms used herein but not defined herein shall have the meanings given such terms in the License Agreement. 2. SHARING OF COSTS 2.1 CLASSIFICATION OF ALRT COSTS. All costs incurred by, on behalf of or which are reimbursable under the Program Agreements by ALRT (the "ALRT Costs") shall be classifiable into three categories consistent with the ALRT financial statements, as follows: (a) Research consulting agreements classified by ALRT as research costs; (b) All other costs classified by ALRT as research and development costs ("R&D Costs"); and (c) Costs classified by ALRT as general and administrative costs ("G&A Costs"). 2.2 PAYMENT OF ALRT COSTS. ALRT Costs will be paid by ALRT to Third Parties, or reimbursed to Allergan and Ligand, in accordance with the terms stated below: (a) All research consulting agreements referred to in Section 2.1(a) are listed on Exhibit A to this Agreement. These agreements shall be assigned to and assumed by either Allergan or Ligand as of the Cut-Off Date (defined below), as prescribed on Exhibit A, and the costs of continuing such agreements shall be the responsibility of the assigned party after such date. As between Allergan and Ligand, the consultant under each such agreement shall perform services under such agreement for the assigned party after such date; provided that all inventions and discoveries made by such consultant pursuant to such agreement (i) on or prior to the Closing Date shall be included in "Program Technology" and (ii) subsequent to the Closing Date shall be owned by the assigned party. (b) ALRT shall pay or reimburse all R&D Costs incurred prior to the date which is thirty (30) days following the date of the License Agreement (the "Cut-Off Date"). R&D costs will consist of (i) R&D costs incurred, identified and invoiced prior to the Cut-Off Date, (ii) R&D costs incurred, identified and not invoiced prior to the Closing Date and (iii) R&D costs incurred, not identified and not invoiced prior to the Closing Date. Expenditures and commitments for R&D Costs shall be consistent with previously-approved R&D activities on behalf of ALRT. (c) ALRT Costs incurred with respect to Selected Compounds after the Cut-Off Date shall be the responsibility of Allergan with respect to Allergan Selected Compounds and Ligand with respect to Ligand Selected Compounds. 2 3 (d) ALRT shall pay or reimburse all G&A Costs incurred prior to the Closing Date. Such costs will include all salary, benefit and severance costs of ALRT's employee. ALRT shall also pay all G&A Costs related to termination of operation of ALRT as a publicly traded company, including costs which may be incurred after the Closing Date. Any such post-Closing costs shall be paid out of the Cash Reserve (defined below). (e) All other expenses incurred after the Closing Date shall be the responsibility of the party incurring such costs. (f) Allergan and Ligand agree not to incur, or seek reimbursement from ALRT for, any ALRT Costs in a manner inconsistent with this Agreement. 2.3 INVOICING OF ALRT COSTS. Within five (5) business days following the Cut-Off Date, Ligand and Allergan will present to ALRT for payment all invoices for ALRT Costs incurred and identified through such Cut-Off Date. Such invoices will be paid by ALRT within five (5) business days of presentation. At the Closing, Ligand and Allergan will identify all additional ALRT Costs and shall agree on a cash reserve ("Cash Reserve") to be established out of ALRT cash on hand as of the Closing Date to pay such additional ALRT costs in accordance with Section 2.3. Any remaining cash on hand in ALRT at the Closing shall be divided equally between Allergan and ALRT as set forth in the Asset Purchase Option Agreement, with a payment to Allergan within three (3) business days of the Closing. Ligand and Allergan shall each take appropriate diligent action to ensure timely presentation of invoices for payment of ALRT Costs in accordance with Section 2.3 and shall continue to collect invoices and other expenses incurred prior to the Cut-Off Date. Ligand and Allergan will send requests to each provider of development services, such as contract research organizations, requesting that each provider submit an invoice up to the Cut-Off Date. Ligand and Allergan shall present such invoices for payment no later than the last day of the Reserve Period. The Reserve Period shall continue through sixty (60) days following the Closing Date. Following the Reserve Period, the cash remaining in the Cash Reserve shall be divided equally between Allergan and ALRT. Any ALRT Costs for which an invoice is not presented prior to the end of the Reserve Period shall be the responsibility of the party whose responsibility it was to present such invoice. 2.4 SELECTED COMPOUND LIABILITIES. Selected Compound liabilities (liabilities relating directly to each party's respective Selected Compounds, including related contingent and any other known or unknown liabilities) shall be assumed by the party receiving exclusive rights to the respective Selected Compounds under the License Agreement. 3 4 2.5 OTHER LIABILITIES. All contingent and any other known or unknown liabilities of ALRT (other than those relating directly to a party's Selected Compounds) shall be allocated on a 50-50 basis as of the Closing Date between Allergan and Ligand in accordance with the Asset Purchase Option Agreement, subject to Section 2.3 above. 3. ONGOING ACTIVITIES 3.1 PRE-CLOSING ACTIVITIES. 3.1.1 RESEARCH AND DEVELOPMENT ACTIVITIES. Each party will continue its existing, ordinary course activities through the Closing Date. 3.1.2 COMPLETION OF CLINICAL TRIALS. All ALRT clinical trials being conducted as of the date hereof are listed on Exhibit B to this Agreement. Each party will continue its existing clinical trial activity on behalf of ALRT through the Closing Date, subject to reimbursement of expenses in accordance with the provisions of this Agreement. 3.2 POST-CLOSING ACTIVITIES. 3.2.1 Each party will be responsible for its own activities following the Closing Date. 3.2.2 Allergan may agree to continue existing work following the Cut-Off Date with respect to Ligand Selected Compounds on a fee-for-services basis. 3.2.3 INDs and other regulatory filings will be promptly transferred following the Closing Date to the proper party in accordance with this Agreement and the License Agreement. 3.2.4 Allergan financial personnel will close ALRT's books as of the Closing Date and ALRT will reimburse Allergan therefor in accordance with ALRT's administrative reimbursement procedures. ALRT financial records will be transferred to Ligand thirty (30) days after the Closing Date; subsequently, Ligand will have the responsibility for payment of additional ALRT invoices and reconciliation of the Cash Reserve accrual in accordance with this Agreement. 4. PURCHASE OF ASSETS OF ALLERGAN 4.1 All ALRT assets as of the date hereof, excluding Program Technology and Selected Compounds, are listed by category (e.g., cash, prepaid assets, equipment, etc.) on Exhibit C to this Agreement. Such list shall be updated on and as of the Closing Date. 4 5 4.2 All assets on such list shall be allocated on such list, as nearly as possible, on a 50-50 basis (or as the parties may otherwise agree), to Allergan and ALRT in accordance with the Asset Purchase Option Agreement. 4.3 Notwithstanding the foregoing, ALRT patent rights (including patent claims against third parties) shall be governed by Section 9 of the License Agreement. 5. CLOSING LOGISTICS 5.1 NOTICE OF EXERCISE. Ligand will deliver, within two (2) business days of the date of this Agreement, revocable notice of its election to acquire all of the outstanding shares of Callable Common Stock of ALRT in accordance with the terms of the Stock Purchase Option pursuant to the Ligand exercise notice in the form attached to the License Agreement as Exhibit A ("Ligand Notice"). Pursuant to the Asset Purchase Option, Allergan will deliver, within two (2) business days, notice of its election to acquire from ALRT the Purchased Assets (as defined in Section 1.1 of that certain Asset Purchase Option Agreement dated June 3, 1995 among Allergan, Ligand and ALRT) in accordance with the terms of the Asset Purchase Option pursuant to the Allergan exercise notice in the form attached to the License Agreement as Exhibit B ("Allergan Notice"). 5.2 NATURE OF CONSIDERATION TO BE PAID BY ALLERGAN AND LIGAND. (a) Ligand intends to make payment at the Closing per share of outstanding ALRT Callable Common Stock, in connection with its exercise of the Stock Purchase Option, as follows: Fourteen Dollars and Twenty-Eight Cents ($14.28) in shares of Ligand Common Stock and Seven Dollars and Sixty-Nine Cents ($7.69) in cash; provided, Ligand reserves its right, pursuant to terms of Article V of the Restated Certificate, to make payment of a greater amount of the Stock Purchase Option Exercise Price (as defined in the Restated Certificate) in cash than set forth herein or in its exercise notice. (b) Allergan intends to make payment at the Closing, in connection with its exercise of the Asset Purchase Option as follows: Eight Million Nine Hundred Thousand Dollars ($8,900,000) in cash. Any amounts due by Allergan in connection with its exercise of the Asset Purchase Option shall be delivered by wire transfer to a bank account selected by Ligand on behalf of ALRT, and notice of which will be delivered no less than two (2) business days prior the Closing. 5.3 REGULATORY FILINGS. (a) Ligand intends to file a registration statement with the SEC within two (2) business days following the date of this Agreement. Such registration statement will register the issuance of any shares of Ligand Common Stock being issued in payment of the Stock Purchase Option Exercise Price in accordance with Sections 5.3 and 5.6 of the Restated Certificate. 5 6 (b) Ligand and Allergan shall, with two (2) business days following the date of this Agreement, make any and all applicable filings required pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended ("HSR Act"), with respect to the transactions contemplated under the License Agreement and the exercise of the Stock Purchase Option and Asset Purchase Option. Each of Ligand and Allergan shall use its commercially reasonable best efforts to obtain early termination, on or prior to the Closing Date, of any applicable waiting period under the HSR Act with respect to such filings. (c) Ligand and Allergan shall use reasonable efforts to assist each other with applicable filings under the HSR Act arising out of the transactions contemplated under the License Agreement and the exercise of the Stock Purchase Option and Asset Purchase Option. 5.4 REDEMPTION OF ALLERGAN'S SPECIAL COMMON STOCK. On the Closing Date, ALRT shall redeem all of the outstanding shares of ALRT Special Common Stock owned by Allergan in accordance with Section 4.5 of the Restated Certificate (notwithstanding the requirement for the written notice referred to in such Section to be delivered fifteen (15) days before the date of redemption). Allergan hereby agrees to submit to ALRT its share certificates representing such Special Common Stock on or promptly following the Closing Date. Thereafter, Allergan shall have no rights as a stockholder of ALRT except the right to receive the Redemption Price in accordance with the Restated Certificate. 6. TECHNOLOGY TRANSFER Promptly following the date hereof but in any event prior to the Closing Date, Allergan and Ligand will deliver to each other the technology transfer items listed on Exhibit D. From the date of execution of this Agreement through *** following the Closing Date (and without limiting the obligations of the parties under Section 3 of the License Agreement), each Party shall (i) provide access to the other Party to all physical manifestations of the Program Technology which they own or Control and (ii) provide, at the requesting Party's expense, reasonable technical assistance and instruction in understanding, interpreting and applying the Program Technology for the purposes of further exploiting the Program Technology and commercially developing products. The obligations set forth in this Section 6 shall not include any obligation to disclose matters outside the Field. Nothing contained in this Agreement shall affect the respective ongoing obligations of Ligand and ALRT under the Asset Purchase Option Agreement to, among other things, share information regarding Purchased Assets with Allergan. 7. INDEMNIFICATION 7.1 BY ALLERGAN. Allergan hereby agrees to indemnify and hold Ligand and its Affiliates and their respective agents and employees harmless from and against any and all suits, claims, actions, demands, liabilities, expenses and/or losses, including reasonable legal expenses and attorneys' fees ("Losses"), including, without limitation, any claim or liability based upon negligence, warranty, strict liability, violation of government regulation or infringement of patent *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 6 7 or other proprietary rights, arising from or occurring as a result of (a) the research, development, manufacture, sale or use of Allergan Selected Compounds, regardless of whether Ligand conducted any such activities with respect to one or more Allergan Selected Compounds prior to the Closing Date or during the Transition Period, or (b) subject to Section 11.2 of the License Agreement, any material breach of this Agreement by Allergan. Allergan shall have no indemnification obligations hereunder in any case where such Losses are based upon the gross negligence or willful misconduct of Ligand. 7.2 BY LIGAND. Ligand hereby agrees to indemnify and hold Allergan and its Affiliates and their respective agents and employees harmless from and against any and all Losses, including, without limitation, any claim or liability based upon negligence, warranty, strict liability, violation of government regulation or infringement of patent or other proprietary rights, arising from or occurring as a result of (a) the research, development, manufacture, sale or use of Ligand Selected Compounds, regardless of whether Allergan conducted any such activities with respect to one or more Ligand Selected Compounds prior to the Closing Date or during the Transition Period, or (b) subject to Section 11.2 of the License Agreement, any material breach of this Agreement by Ligand. Ligand shall have no indemnification obligations hereunder in any case where such Losses are based upon the gross negligence or willful misconduct of Allergan. 8. MISCELLANEOUS 8.1 RETAINED RIGHTS. Nothing in this Agreement shall limit in any respect the right of any Party to conduct research and development in, and market products outside of, the Field using such Party's technology, and except as expressly provided in Section 2 of the License Agreement, no license to use the other Party's technology to do so is granted herein. 8.2 FORCE MAJEURE. No Party shall lose any rights hereunder or be liable to any other Party for damages or losses on account of failure of performance by the defaulting Party if the failure is occasioned by Force Majeure and the Force Majeure shall extend any applicable cure periods provided for herein; provided that the Party claiming Force Majeure has exerted all reasonable efforts to avoid or remedy such Force Majeure; provided, further, that in no event shall a Party be required to settle any labor dispute or disturbance. 8.3 FURTHER ACTIONS. Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement. 8.4 NO TRADEMARK RIGHTS. No right, express or implied, is granted by this Agreement to use in any manner the name "Allergan" or "Ligand" or any other trade name or trademark of another Party or its Affiliates in connection with the performance of this Agreement. All rights to the trademarks "PANRETIN" and "DURARET" shall belong solely to Ligand and/or ALRT. Notwithstanding the foregoing, no later than forty-five (45) days following the Closing Date the legal name for ALRT shall be amended by Ligand to remove any reference to Allergan, 7 8 and both Allergan and Ligand shall have the right to use the acronym "ALRT" solely for purposes of identifying the following Selected Compounds: 268, 324, 1057, 1550 and 4310. 8.5 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by facsimile transmission (receipt verified), or upon receipt if mailed by registered or certified mail (return receipt requested), postage prepaid, or sent by express courier service (receipt verified), to the Parties at the following addresses (or at such other address for a Party as shall be specified by like notice; provided, that notices of a change of address shall be effective only upon receipt thereof): If to Allergan, addressed to: Allergan, Inc. 2525 Dupont Drive Irvine, CA 92715-1599 Attn: Corporate Vice President, General Counsel With copy to: Corporate Vice President, Science and Technology fax: (714) 246-4774 If to Ligand or ALRT, addressed to: Ligand Pharmaceuticals Incorporated 9393 Towne Centre Drive San Diego, CA 92121 Attn: Senior Vice President, General Counsel, Government Affairs With copy to: President fax: (619) 625-4521 8.6 GOVERNING LAW. This Agreement shall be governed by the laws of the State of California, as such laws are applied to contracts entered into and to be performed within such state. Subject to Section 8.15, any claim or controversy arising out of or related to this contract or any breach hereof shall be submitted to a court of competent jurisdiction in the State of California, and the Parties hereby consent to the jurisdiction and venue of such court. In the event of any proceeding to enforce the provisions of this Agreement, the prevailing Party shall be entitled to reasonable attorneys' fees and legal costs. 8.7 WAIVER. Except as specifically provided for herein, the waiver from time to time by a Party of any of its rights or its failure to exercise any remedy shall not operate or be construed as a continuing waiver of same or of any other of such Party's rights or remedies provided in this Agreement. 8.8 SEVERABILITY. If any term, covenant or condition of this Agreement or the application thereof to any Party or circumstance shall, to any extent, be held to be invalid or unenforceable, then (i) the remainder of this Agreement, or the application of such term, covenant 8 9 or condition to parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Agreement shall be valid and be enforced to the fullest extent permitted by law; and (ii) the Parties hereto covenant and agree to renegotiate any such term, covenant or application thereof in good faith in order to provide a reasonably acceptable alternative to the term, covenant or condition of this Agreement or the application thereof that is invalid or unenforceable, it being the intent of the Parties that the basic purposes of this Agreement are to be effectuated. 8.9 HEADINGS; AMBIGUITIES. The section and paragraph headings contained herein are for the purposes of convenience only and are not intended to define or limit the content of said sections or paragraphs. Ambiguities, if any, in this Agreement shall not be construed against a Party, irrespective of which Party may be deemed to have authorized the ambiguous provision. 8.10 ENTIRE AGREEMENT; AMENDMENT. This Agreement (including all exhibits attached hereto), with the License Agreement, the Mutual General Release and the Program Agreements, sets forth all the covenants, promises, agreements, warranties, representations, conditions and understandings between the Parties hereto with respect to the subject matter hereof, and supersedes and terminates all prior agreements and understandings between the Parties. There are no covenants, promises, agreements, warranties, representations, conditions or understandings, either oral or written, between the Parties other than as set forth herein and therein. Without limiting the foregoing, effective as of the Effective Date, the Joint Agreements shall be terminated and of no further force or effect. No subsequent alteration, amendment, change or addition to this Agreement shall be binding upon the Parties hereto unless reduced to writing and signed by the respective authorized officers of the Parties. 8.11 MUTUAL RELEASES. On the Closing Date, the Parties have executed and delivered a Mutual General Release in the form attached to the License Agreement as Exhibit I. 8.12 RELATIONSHIP OF THE PARTIES. Nothing contained in this Agreement is intended or is to be construed to constitute Allergan, Ligand or ALRT as partners or joint venturers. Except as expressly provided herein (or, with respect to Ligand and ALRT, as permitted by law), no Party hereto shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of the other Party or to bind any other Party to any contract, agreement or undertaking with any Third Party. 8.13 SUCCESSORS AND ASSIGNS. Any Party may assign its rights or obligations under this Agreement to any other Person without the prior written consent of the other Party; provided, however, that no such assignment shall relieve any Party of its obligations to another Party under this Agreement. Subject to the foregoing, any reference to Allergan, Ligand or ALRT hereunder shall be deemed to include the successors thereto and assigns hereof. 8.14 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, and all of which counterparts, taken together, shall constitute one and the same instrument. This 9 10 Agreement shall initially constitute an agreement between Allergan and Ligand. Upon the Closing Date, Ligand and Allergan shall take all actions necessary to cause ALRT to execute and deliver this Agreement, and ALRT shall thereupon become a party hereto. 8.15 DISPUTE RESOLUTION. In an effort to resolve informally and amicably any claim, controversy, or dispute arising out of or related to the interpretation, performance, or breach of this Agreement or the License Agreement (a "Dispute") without commencing formal legal action, each Party shall notify each other Party to the Dispute in writing of any Dispute hereunder that requires resolution. Such notice shall set forth the nature of the Dispute, the amount involved, if any, and the remedy sought. Each Party to such Dispute shall designate an employee to investigate, discuss and seek to settle the matter between them. If such employees are unable to settle the matter within *** after delivery of such notification, the matter shall be submitted to the Chief Executive Officers of each of the Parties involved in such Dispute for consideration. If settlement cannot be reached through their efforts within an additional *** (or such longer time period as they shall agree upon in writing) then any Party may thereafter take such actions as it deems appropriate. During such *** (or longer period as agreed in writing), the Chief Executive Officers shall meet no less than once face-to-face. The Parties agree that any applicable statute of limitations shall be tolled during the pendency of such informal dispute resolution process and that no Party shall raise or assert any claim of laches or other legal or equitable principle of limitation or repose of action based upon such process. The Parties agree that in no event shall any of them be subject to the awarding of any punitive or exemplary damages in any legal action arising out of or related to this Agreement or the License Agreement. [Remainder of This Page Intentionally Left Blank] *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 10 11 IN WITNESS WHEREOF the Parties have executed this Agreement as of the date first above written. ALLERGAN, INC. By /s/ William C. Shepard -------------------------------------- William C. Shepard Chairman and Chief Executive Officer LIGAND PHARMACEUTICALS INCORPORATED By /s/ David E. Robinson -------------------------------------- - ---------------------------------------- David E. Robinson President ALLERGAN LIGAND RETINOID THERAPEUTICS, INC. By /s/ David E. Robinson -------------------------------------- - ---------------------------------------- David E. Robinson President 11 12 EXHIBIT A RESEARCH CONSULTING AGREEMENTS 13 EXHIBIT A CONFIDENTIAL *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 14 EXHIBIT B ALRT CLINICAL TRIALS 15 22-Aug-97 06:44 A.M. COMMENTS: 1057 Oral Indication Status Last Edit Comments *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 16 22-Aug-97 06:44 A.M. COMMENTS: 1057 Topical Indication Status Last Edit Comments *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 17 22-Aug-97 06:44 A.M. INDICATIONS: 1550
INDICATION # OF PTS STATUS DRUG ROUTE MNGMT SITES START STOP LAST ACCRUAL F/U *** *** ***
*** Draft/Confidential/Not For Distribution *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 18 ALRT 1057 Oral Capsules - -------------------------------------------------------------------------------- INDICATION STATUS - -------------------------------------------------------------------------------- *** *** *** Closed=closed to accrual; Complete=all patients off-study; Protocol=commitments made; Ongoing=patients on study *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 19 ALRT 1550 Oral Capsules - -------------------------------------------------------------------------------- INDICATION STATUS - -------------------------------------------------------------------------------- *** *** *** Closed=closed to accrual; Complete=all patients off-study; Protocol=commitments made; Ongoing=patients on study *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 20 ACRT 1057 Topical Gel - -------------------------------------------------------------------------------- INDICATION STATUS - -------------------------------------------------------------------------------- *** *** *** Closed=closed to accrual; Complete=all patients off-study; Protocol=commitments made; Ongoing=patients on study *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 21 EXHIBIT C ALRT ASSETS 22 ALLERGAN LIGAND RETINOID THERAPEUTICS, INC. (ALRT) EXHIBIT C TO TRANSITION AGREEMENT - SCHEDULE OF ASSETS @ SEPTEMBER 24, 1997 (100%) (50%)* (50%)* ALRT Ligand Allergan *** *** *** * Allocation subject to cost-sharing arrangement specified in the Agreement. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 23 EXHIBIT D TECHNOLOGY TRANSFER ITEMS 24 [LOGO] Allergan CORPORATE OFFICES New Products, Science and Technology FACSIMILE DATE: September 19, 1997 ------------------------------------------------------------------------ TO: *** ------------------------------------------------------------------------ FAX: *** ------------------------------------------------------------------------ FROM *** ------------------------------------------------------------------------ PHONE: *** FAX: *** ------------------------- ---------------------------------- THIS FAX MESSAGE CONSISTS OF THIS COVER SHEET AND 1 PAGE(S). If you do not receive all of this message or it is not legible, please contact us at the above telephone number. Our FAX number is (714) 246-6987. Andres, As we discussed yesterday, attached is a memo describing Allergan's priority technology transfer items. We have tried to limit this list to critical protocols and reagents that Allergan will need to start running some of the key assays currently done at Ligand. Please supply a list of Ligand priorities based on similar criteria. If we can agree that items on both lists will be transferred prior to closing, we can include this in the transition agreement. Best regards. *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 25 [LOGO] PHARMACEUTICAL R & D RETINOID TEAM INTEROFFICE MEMORANDUM TO: *** FROM: *** RE: Request for reagents & protocols from Ligand DATE: September 19, 1997 REAGENTS: *** *** *** PROTOCOLS: *** *** *** RLC:kg *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 26 [LOGO] LIGAND PHARMACEUTICALS INCORPORATED 10255 SCIENCE CENTER DRIVE SAN DIEGO, CALIFORNIA 92121 TELEPHONE: (619) 535-3900 FAX NO.: (619) 550-7801 FACSIMILE COVER SHEET NUMBER OF PAGES BEING TRANSMITTED: 3 (INCLUDING COVER SHEET) CONFIDENTIAL (If you do not receive all of the pages, please call (619) 550-7554) TO: *** ALLERGAN, INC. URGENT FAX: *** DATE: SEPTEMBER 22, 1997 FROM: *** Please see attached letter. This message is intended only for the use of the individual or entity to which it is addressed, and may contain information that is privileged, confidential and exempt from disclosure under applicable law. If the reader of this message is not the intended recipient, or the employee or agent responsible for delivering the message to the intended recipient, you are hereby notified that any discrimination, distribution or copying of this communication is strictly prohibited. If you have received this communication in error, please notify us immediately by telephone and return the original message to us at the above address via the U.S. postal service. Thank you. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 27 [LOGO] LIGAND *** PHARMACEUTICALS *** *** September 22, 1997 Via facsimile: (714) 246-6987 *** Allergan, Inc. 2525 Dupont Drive Irvine, CA 92715-1599 *** Please find enclosed our short list of critical reagents and protocols to include in the priority technology transfer items. It has been prepared in the spirit of our conversation of Friday to have a very short list of items that can meet our most immediate critical needs. Regarding information on compounds on the ALRT database, I would request that you provide us as soon as possible with the following key priority data to facilitate the enhancement of the current database. The key information presently needed is: 1. *** 2. *** 3. *** It would be extremely useful if those data can be provided in a simple tabular format or a spread sheet to facilitate quick analysis and evaluation. Best regards, *** ANV/dd Enclosure Ligand Pharmaceuticals Inc.: 9393 Town Center Drive, San Diego, CA 92121 (619) 535-3900 Fax (619) 535-3906 *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 28 REAGENTS *** *** *** PROTOCOLS *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. EX-10.167 4 EXHIBIT 10.167 1 EXHIBIT 10.167 DEVELOPMENT AND LICENSE AGREEMENT (TARGRETIN) BETWEEN ELI LILLY AND COMPANY AND LIGAND PHARMACEUTICALS INCORPORATED DATED NOVEMBER 25, 1997 2 DEVELOPMENT AND LICENSE AGREEMENT (TARGRETIN) THIS DEVELOPMENT AND LICENSE AGREEMENT ("AGREEMENT") is entered into as of November 25, 1997 between ELI LILLY AND COMPANY, an Indiana corporation having its principal place of business at Lilly Corporate Center, Indianapolis, Indiana 46285 ("LILLY"), AND LIGAND PHARMACEUTICALS INCORPORATED, a Delaware corporation having its principal place of business at 9393 Towne Centre Drive, San Diego, California 92121 ("LIGAND"). RECITALS WHEREAS, Ligand is developing a compound known as Targretin for oncology, dermatology and metabolic diseases, and is engaged in a specific research program and development program aimed at understanding the applications of Targretin; and WHEREAS, Lilly is interested in developing and commercializing pharmaceutical products to treat and prevent medical conditions, including, but not limited to, diabetes mellitus, obesity, insulin resistance, dyslipidemia and cardiovascular disorders associated with insulin resistance and obesity and would like to collaborate with Ligand in an effort to develop and commercialize Targretin for use in treating these medical conditions; and WHEREAS, Ligand and Lilly believe that each party can bring significant and complementary strengths to such a collaboration. NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter recited, the parties agree as follows: ARTICLE 1 DEFINITIONS When used in this Agreement, each of the following terms shall have the meanings as set forth below: 1 3 1.1 "AFFILIATE" shall mean any company or entity controlled by, controlling, or under common control with a party hereto and shall include without limitation any company fifty percent (50%) or more of whose voting stock (or other comparable ownership interest for an entity other than a corporation) is owned or controlled, directly or indirectly, by a party, and any company or entity which owns or controls, directly or indirectly, fifty percent (50%) or more of the voting stock (or other comparable ownership interest for an entity other than a corporation) of a party or equivalent power to direct the management or policies of such company or entity. 1.2 "AGREEMENT TERM" shall mean the term of this Agreement, including any extensions thereof, commencing on the Effective Date and ending upon the expiration or earlier termination of this Agreement. 1.3 "ALLIANCE DIRECTORS COMMITTEE" shall mean the committee described in Section 2.3. 1.4 "CALENDAR QUARTER" shall mean a quarter ending on March 31, June 30, September 30 or December 31 of each Calendar Year. 1.5 "CALENDAR YEAR" shall mean the twelve month period ending on December 31. 1.6 "COLLABORATION AGREEMENT" shall mean the Collaboration Agreement of even date herewith among Lilly, Ligand and Allergan Ligand Retinoid Therapeutics, Inc. 1.7 "COMBINATION PRODUCT" shall mean a Drug Product which, in addition to Targretin, contains one or more pharmaceutically active ingredients. 1.8 "COMMERCIALIZATION PROGRAM" shall mean all activities related to the development and commercialization of a Drug Product that occur after Phase III Enrollment including, without limitation, the conduct of Phase III Clinical Trials, activities associated with the preparation, filing and prosecution of an NDA and all activities related to commercialization of a Drug Product. The Commercialization Program shall also include all activities relating to manufacturing, including, without limitation, manufacturing process development and scale-up, chemistry, manufacturing and controls, and related activities regardless of whether they occur before or after Phase III Enrollment, and all research and related activities in support of an NDA that occur after Phase III Enrollment. 1.9 "CONFIDENTIAL INFORMATION" shall mean all information, inventions, know-how and data disclosed by one party to the other party, or its respective Affiliates, pursuant to this Agreement, including without limitation, information relating to research and development plans, experiments, results and plans, the existence of compounds, therapeutic leads, candidates and products, clinical and preclinical data, trade secrets and manufacturing, 2 4 marketing, financial, regulatory, personnel and other business information and plans, whether in oral, written, graphic or electronic form and whether in existence as of the Effective Date or developed or acquired in the future, except where such information (i) is public knowledge at the time of disclosure by the disclosing party, (ii) becomes public knowledge through no fault of the receiving party, (iii) was in the possession of the receiving party at the time of disclosure by the disclosing party as evidenced by proper business records or (iv) is disclosed to the receiving party by a Third Party, to the extent such Third Party's disclosure was not in violation of any obligation of confidentiality. 1.10 "COVER" (including variations thereof such as "Covering", "Covered", and "Coverage") shall mean that the manufacture, use, import, offer for sale or sale of Targretin or Drug Product would infringe a Valid Claim; provided, with respect to a process or manufacturing patent, that such a Valid Claim therein effectively precludes Third Parties from manufacturing, using, importing, offering for sale and selling Drug Products. The determination of whether Targretin or a Drug Product is Covered by a particular Valid Claim shall be made on a country by country basis. A Valid Claim shall be deemed to provide effective preclusion hereunder where (i) there is no competing Drug Product being marketed or (ii) if a Drug Product is being marketed by a competitor, it infringes the Valid Claim (including any period in which, and provided that, the Valid Claim is being litigated). 1.11 "DATA EXCLUSIVITY PERIOD" shall mean the period, if any, during which the FDA, or other equivalent regulatory agency in the case of countries other than the United States, prohibits reference, for purposes of seeking Regulatory Approval, to clinical and other data contained in the Regulatory Approval package relating to a Drug Product, without the consent of the party holding the NDA or equivalent Regulatory Approval. 1.12 "DEVELOPMENT PLAN" shall mean the plan described in Section 3.1. 1.13 "DEVELOPMENT PROGRAM" shall mean those activities with respect to a Drug Product that occur after the earlier of December 15, 1998 or the filing of an IND with respect to such Drug Product. 1.14 "DRUG DELIVERY SYSTEM" shall mean enhancements of a Drug Product related to convenience of administration of the active ingredient such as injectors, pens, inhalers, sustained release formulations or transdermal patches, but not capsules, tablets, gel caps, solutions, normal pharmaceutical excipients or the like. 1.15 "DRUG PRODUCT" shall mean every pharmaceutical composition in finished product form which contains therapeutic levels of Targretin and which is intended for administration to humans in the Field. 1.16 "EFFECTIVE DATE" shall mean the effective date of the Collaboration Agreement. 3 5 1.17 "FDA" shall mean the United States Food and Drug Administration. 1.18 "FIELD" shall mean the development and commercialization of Drug Products for use in the treatment, palliation, prevention and/or remission of all medical conditions including, but not limited to, diabetes mellitus, obesity, insulin resistance, dyslipidemia and cardiovascular disorders associated with insulin resistance and obesity, but excluding the treatment, palliation, prevention and/or remission of cancer and dermatological disease. 1.19 "FIRST COMMERCIAL SALE" shall mean, in any particular country, the first sale for use by the general public of a Drug Product after receipt of Regulatory Approval in that country. 1.20 "GAAP" shall mean U.S. generally accepted accounting principles, consistently applied. 1.21 "IND" shall mean an Investigational New Drug Application as defined in the United States Food, Drug, and Cosmetic Act and applicable regulations promulgated thereunder, as they are amended or supplemented from time to time, or an equivalent application under any successor law or regulations. 1.22 "IND ACCEPTANCE" shall mean the earliest of (i) the filing with the FDA of an IND and the failure by the FDA, within thirty (30) days following filing, to object to the IND or institute a clinical hold, (ii) the removal of the objection or clinical hold referred to in (i) above, if any, or (iii) the acceptance of an equivalent application by the equivalent agency in a Major Foreign Market country. 1.23 "JOINT PATENTS" shall mean all patents, both foreign and domestic (including without limitation, all substitutions, extensions, reissues, renewals, reexaminations, patents of addition, supplementary protection certificates and inventors' certificates thereof), and all patent applications (including provisional applications, divisions, continuations and continuations-in-part), heretofore or hereafter filed or having any legal force in any country together with any patents that have issued or in the future issue therefrom, jointly owned, in whole or in part, or jointly licensed by Ligand or any Ligand Affiliate and Lilly or any Lilly Affiliate. In the circumstance where the addition of new matter to a solely-owned patent application results in a continuation-in-part that is a Joint Patent, only the new matter shall be deemed jointly owned under this Agreement. 1.24 "JOINT PROGRAM COMMITTEE" shall mean the committee described in Section 2.4 of this Agreement. 1.25 "JOINT TECHNOLOGY" shall mean all tangible or intangible know-how, trade secrets, routes of synthesis, ideas, processes, inventions (whether or not patentable), tests, assays, quality control or other data, clinical and preclinical results, technical information, and 4 6 any physical, chemical or biological material, or any replication of any part of such material, which are jointly developed or acquired by Ligand or any Ligand Affiliate and Lilly or any Lilly Affiliate. 1.26 "LIGAND PATENTS" shall mean all patents, both foreign and domestic (including without limitation, all substitutions, extensions, reissues, renewals, reexaminations, patents of addition, supplementary protection certificates and inventors' certificates thereof), and all patent applications (including provisional applications, divisions, continuations and continuations-in-part), heretofore or hereafter filed or having any legal force in any country together with any patents that have issued or in the future issue therefrom, which are owned, controlled, or licensed (with the right to disclose and sublicense and subject to the rights of Third Parties as of the Effective Date), in whole or in part, by Ligand or any Ligand Affiliate, and which Cover Targretin and/or Drug Products, but excluding any Joint Patents. 1.27 "LIGAND SYSTEMIC PRODUCT" shall mean any product sold or marketed by or on behalf of Ligand or any Ligand Affiliate or sublicensee for use outside the Field which contains Targretin and is intended for Systemic Administration. 1.28 "LIGAND TECHNOLOGY" shall mean all tangible or intangible know-how, trade secrets, routes of synthesis, ideas, processes, inventions (whether or not patentable or patented), tests, assays, quality control or other data, clinical and preclinical results, technical information, and any physical, chemical or biological material, or any replication of any part of such material, which is or has been developed or acquired either before or after the Effective Date (with the right to disclose and sublicense and subject to the rights of Third Parties as of the Effective Date) by Ligand or any Ligand Affiliate reasonably necessary for the development, manufacture, use, import, offer for sale or sale of Targretin and/or Drug Products. 1.29 "LIGAND TOPICAL PRODUCT" shall mean any product sold or marketed by or on behalf of Ligand or any Ligand Affiliate which contains Targretin and is topically applied but does not result in Systemic Administration of Targretin. 1.30 "LILLY PATENTS" shall mean all patents, both foreign and domestic (including without limitation, all substitutions, extensions, reissues, renewals, reexaminations, patents of addition, supplementary protection certificates and inventors' certificates thereof), and all patent applications (including provisional applications, divisions, continuations and continuations-in-part), heretofore or hereafter filed or having any legal force in any country, together with any patents that have issued or in the future issue therefrom, owned, controlled, or licensed (with the right to disclose and sublicense and subject to the rights of Third Parties as of the Effective Date) in whole or in part, by Lilly or any Lilly Affiliate and which Cover Targretin and/or Drug Products, but excluding any Joint Patents. 5 7 1.31 "LILLY TECHNOLOGY" shall mean all tangible or intangible know-how, trade secrets, routes of synthesis, ideas, processes, inventions (whether or not patentable or patented), tests, assays, quality control or other data, clinical and preclinical results, technical information, and any physical, chemical or biological material, or any replication of any part of such material, which is or has been developed or acquired either before or after the Effective Date (with the right to disclose and sublicense and subject to the rights of Third Parties as of the Effective Date) by Lilly or any Lilly Affiliate, reasonably necessary for the development, manufacture, use, import, offer for sale or sale of Targretin and/or Drug Products. 1.32 "LILLY ROYALTY TERM" shall mean, with respect to a Drug Product in each country, (a) if the manufacture, use, import, offer for sale or sale of the Drug Product in such country is Covered by a Lilly Patent, Ligand Patent or Joint Patent, the period of time equal to the longer of (i) *** from the date of First Commercial Sale of such Drug Product in such country or (ii) the expiration of the last-to-expire applicable patent in such country; provided, however, if the manufacture, use, import, offer for sale or sale of such Drug Product is Covered only by a Valid Claim of a pending patent application in such country, the Royalty Term shall expire, except as provided in (b) below, *** from the date of the First Commercial Sale in such country unless (A) the pending patent application Covering such Drug Product issues prior to the end of such *** period, in which case the Lilly Royalty Term shall not expire at the end of such *** period, or (B) the pending patent application Covering such Drug Product issues after the end of such *** period, in which case the Lilly Royalty Term shall expire at the end of such *** period but shall be reinstated from the date the patent issues, or (b) if the manufacture, use, import, offer for sale or sale of such Drug Product in such country is not so Covered by a Lilly Patent, Ligand Patent or Joint Patent, the period of time *** in such country. Ligand shall pay all royalties due to Allergan, Inc. on sales of Drug Products by Ligand. 1.33 "MAJOR FOREIGN MARKETS" shall mean Japan, the United Kingdom, France, Germany, Spain, Italy, or the European Union as an entity. 1.34 "MARKETING APPROVAL" shall mean the date on which Lilly, any Lilly Affiliate, Sublicensee or permitted assignee first receives final approval of the labeling letter in the United States or the equivalent approval in a Major Foreign Market with respect to a particular Drug Product. 1.35 "NDA" shall mean, with respect to a particular Drug Product, the New Drug Application filed with the FDA pursuant to 21 U.S.C. Section 357 and 21 C.F.R. Section 314 with respect to that Drug Product, as they are amended or supplemented from time to time, or an equivalent application under any successor law or regulations. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 6 8 1.36 "NDA FILING" shall mean, with respect to a particular Drug Product, the acceptance of an NDA by the FDA or acceptance of an equivalent filing by the equivalent agency in a Major Foreign Market country. 1.37 "NET SALES" shall mean, with respect to a Drug Product, the gross amount invoiced by Lilly, a Lilly Affiliate or Sublicensee (other than Ligand and any Ligand Affiliate) to unrelated third parties for the Drug Product, less: *** *** *** *** *** *** *** *** *** *** *** *** Such amounts shall be determined from the books and records of Lilly, Lilly's Affiliate or Lilly's Sublicensee which shall be maintained in accordance with GAAP. In the event the Drug Product is sold in a country as part of a Combination Product, the Net Sales of the Drug Product, for the purposes of determining royalty payments, shall be determined by multiplying the Net Sales (as defined above in this Section) of the Combination Product by the fraction, A/(A+B) where A is the average sale price of the Drug Product for the reporting period when sold separately in finished form and B is the average sale price of the other product(s) sold separately in finished form; provided that, *** *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 7 9 *** *** *** In the event a Combination Product contains a Drug Product and a "Drug Product" as defined in the Collaboration Agreement (which, for purposes of this Section 1.37 shall be deemed a Drug Product hereunder), Net Sales of each Drug Product in the Combination Product shall be separately calculated as follows: (i) if both Drug Products are sold separately in finished form, the Net Sales for each Drug Product in the Combination Product shall be separately calculated by multiplying the Net Sales of the Combination Product by the fraction A/A+B where A is the average sale price of the particular Drug Product for which Net Sales is being determined and B is the average sale price of the other Drug Product in the Combination Product; (ii) *** *** *** *** *** *** *** 1.38 "OPTION AGREEMENT" shall mean that certain Option and Wholesale Purchase Agreement of even date herewith between Ligand and Lilly. 1.39 "PHASE II CLINICAL TRIALS" shall mean small scale human clinical trials conducted by Lilly or any Lilly Affiliate in subjects to collect preliminary data regarding efficacy of the Drug Product in the particular medical condition for which it is being studied, as well as to obtain some indication of the dosage regimen required. 1.40 "PHASE III CLINICAL TRIALS" shall mean large scale human clinical trials conducted by Lilly or any Lilly Affiliate in subjects and intended to generate data concerning the safety and efficacy of a Drug Product in the particular medical condition for which it is being studied sufficient to support registration of the Drug Product with drug regulatory authorities. 1.41 "PHASE III ENROLLMENT" shall mean the enrollment and treatment of the first subject in Phase III Clinical Trials of a Drug Product. 1.42 "PROTOCOLS" shall have the meaning set forth in Section 3.3 of this Agreement. 1.43 "OPTION TERRITORY" shall have the meaning set forth in Section 4.4 of this Agreement. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 8 10 1.44 "OPTION NOTICE" shall have the meaning set forth in Section 4.4 of this Agreement. 1.45 "REGULATORY APPROVAL" shall mean all authorizations by the appropriate governmental entity or entities necessary for commercial sale of a Drug Product (including exports) in a jurisdiction in which Lilly or any Lilly Affiliate elects to market the Drug Product including, without limitation, approval of labeling, price, reimbursement and manufacturing. 1.46 "RESEARCH PROGRAM" shall mean those activities with respect to Targretin that occur prior to the earlier of December 15, 1998 or the filing of an IND with respect to a Drug Product. 1.47 "ROYALTY TERM" shall mean, with respect to a Drug Product in each country, (a) if the manufacture, use, import, offer for sale or sale of the Drug Product in such country is Covered by a Joint Patent, Lilly Patent or Ligand Patent, the period of time equal to *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** 1.48 "STEERING COMMITTEE" shall mean the committee described in Section 2.2 of this Agreement. 1.49 "SUBLICENSEE" shall mean (a) a Third Party to which Lilly or any Lilly Affiliate has licensed the right to sell a Drug Product or (b) a Third Party to which Lilly or any Lilly Affiliate has granted the exclusive right to promote and distribute a Drug Product in the United States, Japan, the United Kingdom, France, Germany, Spain or Italy under an arrangement substantially different from wholesale distributor arrangements typically employed in such countries. 1.50 "SYSTEMIC ADMINISTRATION" shall mean administration of a pharmaceutical composition by any approved means with the purpose of obtaining pharmacological activity after the pharmaceutical composition reaches the systemic circulation. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 9 11 1.51 "TARGRETIN" shall mean 4-[1-(3,5,5,8,8,-pentamethyl-5,6,7,8-tetrahydro-2- naphthalenyl)-1-ethenyl]-benzoic acid, *** *** *** 1.52 "TECHNICAL OPERATING PLAN" shall mean the Research and Development Technical Operating Plan as revised from time to time. 1.53 "THIRD PARTY" shall mean any entity which is not a party or Affiliate of any party to this Agreement. 1.54 "VALID CLAIM" shall mean any claim (a) issued in an unexpired patent which has not been held unenforceable, unpatentable or invalid by a decision of a court or other governmental agency of competent jurisdiction following exhaustion of all possible appeal processes, and which has not been admitted to be invalid or unenforceable through reissue, reexamination or disclaimer, or (b) of a pending patent application, so long as such patent application is being diligently prosecuted. ARTICLE 2 RESEARCH SCOPE AND GOVERNANCE 2.1 PURPOSE AND SCOPE. The parties desire to collaborate in a Research Program and a Development Program to develop and commercialize Drug Product for use in the Field. Subject to the terms described herein, both Ligand and Lilly shall use their respective commercially reasonable efforts to achieve the goals set forth in this Agreement. Promptly after the Effective Date, Ligand will submit a draft Technical Operating Plan, covering the general subjects set forth on Schedule 2.1. The parties will promptly after submission by Ligand finalize the Technical Operating Plan. The governance provisions described herein shall relate to the conduct of the Research Program and the Development Program. Lilly shall be solely responsible for governance of the Commercialization Program. The Technical Operating Plan is intended as a work plan summarizing the present plans regarding key activities with respect to Drug Products. It is subject to amendment from time to time by the committees described below. Notwithstanding anything in the Technical Operating Plan to the contrary, the rights of the parties with respect to Drug Products shall be governed in all respects by the terms of this Agreement. 2.2 STEERING COMMITTEE. (a) The Research Program and the Development Program shall be conducted under the overall direction of the Steering Committee comprised of four (4) members, with two (2) appointed by Ligand and two (2) appointed by Lilly. The Steering *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 10 12 Committee established by this Agreement shall be the same committee as the Steering Committee established by the Collaboration Agreement. All actions of the Steering Committee with respect to the activities contemplated by this Agreement shall be governed by the terms of this Agreement. The initial members of the Steering Committee shall be: (a) for Ligand, D. Robinson and A. Negro-Vilar, and (b) for Lilly, J. Harper and J. Caro. *** Either party may change its representative on the Steering Committee at any time by prior written notice to the other party. The party hosting the meeting of the Steering Committee shall prepare and deliver to the other party one week prior to the meeting the agenda for the meeting. The party hosting the meeting of the Steering Committee shall prepare and deliver to the other party within ten (10) days after the date of such meeting, minutes of the meeting that set forth all decisions of the Steering Committee relating to the Research Program and the Development Program in form and content reasonably acceptable to the other party. Minutes shall be deemed approved unless any member of the Steering Committee objects to the accuracy of such minutes in writing to the other party within ten (10) business days of receipt. If a party objects to the minutes and the objection is not resolved, the objection will be deemed a dispute and resolved pursuant to Section 2.6. (b) The purpose of the Steering Committee shall be to make key strategy, policy and resource decisions regarding the Research Program and the Development Program and to carry out its other responsibilities described in this Agreement. The Steering Committee shall meet at least once in each Calendar Quarter, at such times and places as are agreed to by Ligand and Lilly, alternating between San Diego and Indianapolis, or such other locations as the members of the Steering Committee shall agree. Meetings of the Steering Committee may be attended by such other directors, officers and employees of each party as such party deems necessary, and by such consultants and non-employee agents of each party as the members of the Steering Committee may from time to time agree, but only members of the Steering Committee shall have the right to vote at such meetings. The Steering Committee, by unanimous consent, shall have the authority to amend or waive compliance with the provisions of this Agreement relating to the scheduling and conduct of the meetings of all committees established pursuant to this Agreement. Any dispute regarding any such amendment or waiver shall not be subject to the dispute resolution provisions of Section 2.6. 2.3 ALLIANCE DIRECTORS COMMITTEE. (a) Promptly after the Effective Date, Lilly and Ligand each shall appoint one of their respective employees (each an "Alliance Director") to coordinate the execution of the Research Program and the Development Program. The Alliance Directors shall be the primary contacts between the parties with respect to the Research Program and the Development Program. Either party may change its designee as the Alliance Director upon prior written notice to the other party. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 11 13 (b) Promptly after the Effective Date, Lilly and Ligand each shall appoint an Alliance Directors Committee to assist the Alliance Directors in the implementation and execution of the Research Program and the Development Program. The Alliance Directors Committee shall consist of both Alliance Directors and two (2) additional voting members, one (1) appointed by Ligand and one (1) appointed by Lilly. Meetings of the Alliance Directors Committee may be attended by Joint Program Committee representatives, as well as consultants and other agents of Ligand and Lilly as are deemed necessary by the Alliance Directors, but only members of the Alliance Directors Committee shall have the right to vote at such meetings. The Alliance Directors Committee shall report to the Steering Committee which shall have the right to review, accept, reject or modify all actions of the Alliance Directors Committee. Either party may change its members of the Alliance Directors Committee upon prior written notice to the other party. (c) *** *** The party hosting the meeting of the Alliance Directors Committee shall prepare and deliver to the other party one week prior to the meeting the agenda for the meeting. The party hosting the meeting of the Alliance Directors Committee shall prepare and deliver to the other party within ten (10) days after the date of such meeting, minutes of the meeting that set forth all decisions of the Alliance Directors Committee relating to the Research Program and the Development Program in form and content reasonably acceptable to the other party. Minutes shall be deemed approved unless any member of the Alliance Directors Committee objects to the accuracy of such minutes in writing to the other party within ten (10) business days of receipt. If a party objects to the minutes and the objection is not resolved, the objection will be deemed a dispute and resolved pursuant to Section 2.6. (d) The Alliance Directors Committee shall be responsible for the execution of the Research Program and the Development Program and direction of the Joint Program Committee. It may appoint such other committees or working groups, with such duties and memberships, as it deems appropriate. The Alliance Directors Committee shall have such additional duties and responsibilities as are given to it by the Steering Committee and shall meet with such frequency as is necessary to complete its duties and as may otherwise be required by the Steering Committee. 2.4 JOINT PROGRAM COMMITTEE. Promptly after the Effective Date, Ligand and Lilly through the Alliance Directors Committee shall appoint the Joint Program Committee. The Joint Program Committee will be responsible for the day to day implementation of the Research Program and the Development Program. The Joint Program Committee shall consist of six (6) voting members, two (2) appointed by Ligand and four (4) appointed by Lilly. Decisions of the committee shall be made by majority vote with a quorum for any meeting consisting of all six members, provided, however, that if the Joint Program Committee is unable to act because of a lack of a quorum, either Lilly or Ligand may call a new meeting pursuant to five (5) days written notice at which a quorum shall consist of four (4) members. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 12 14 Meetings of the Joint Program Committee may be attended by such other directors, officers and employees of each party as such party deems necessary, and by such consultants and non-employee agents of each party as the members of the Joint Research Committee may from time to time agree, but only members of the committee shall be entitled to vote. This committee shall report to the Alliance Directors Committee which shall have the right to review, accept, reject or modify all actions of the Committee subject to the dispute resolution mechanism set forth in Section 2.6. Any failure of the Alliance Directors Committee to review, accept, reject or modify actions of the Joint Program Committee may be treated as a dispute by the written request of a party and be resolved pursuant to Section 2.6. Either party may change its representatives on the Joint Program Committee upon written notice to the other party. The party hosting the meeting of the Joint Program Committee shall prepare and deliver to the other party one week prior to the meeting the agenda for the meeting. The party hosting the meeting of the Joint Program Committee shall prepare and deliver to the other party within ten (10) days after the date of such meeting, minutes of the meeting that set forth all decisions of the Joint Program Committee relating to the Research Program and the Development Program in form and content reasonably acceptable to the other party. Minutes shall be deemed approved unless any member of the Joint Program Committee objects to the accuracy of such minutes in writing to the other party within ten (10) business days of receipt. 2.5 STAFFING AND FUNDING. Lilly shall pay to Ligand such research funds with respect to Drug Product, as are provided in the Collaboration Agreement. Lilly shall pay Ligand for costs incurred by Ligand in association with the performance of the preclinical activities required for the development of the Drug Products, as provided in Section 3.3. The resource requirements for the Research Program and the Development Program shall be determined by the Joint Program Committee and approved by the Alliance Directors Committee. Each party shall provide with respect to the Research Program and the Development Program such accounting, research and other information as is required of such party pursuant to the Collaboration Agreement. For reimbursement by Lilly to Ligand of costs associated with the Research Program and the Development Program, Lilly shall have such audit and review rights as are provided in the Collaboration Agreement. Staffing levels and credentials for personnel provided by Ligand shall be as set forth in the Collaboration Agreement. 2.6 DISPUTE RESOLUTION. Any dispute arising from the Joint Program Committee shall first be presented to the Alliance Directors Committee for resolution. Any dispute arising from the Alliance Directors Committee shall be presented to the Steering Committee for resolution. Any disputes arising from the Steering Committee shall be presented to David Robinson or his successor as Chief Executive Officer of Ligand on behalf of Ligand, and August M. Watanabe or his successor as Chief Scientific Officer of Lilly on behalf of Lilly. These executives shall confer and consider each party's view and shall attempt in good faith to resolve such disagreements between themselves. If the executives cannot promptly resolve such disagreements and if such disagreements relate to the conduct of or decisions made as a part of the Development Program or the Commercialization Program, for example, 13 15 disagreements regarding the initiation and termination of preclinical tests and clinical trials, the matter shall be decided by August M. Watanabe or his successor as Chief Scientific Officer of Lilly. If the dispute relates to the Research Program, the executives shall establish a mechanism to resolve the disagreement promptly and efficiently, without waiving any rights which either party may have under this Agreement, by law or otherwise. Any action requiring Steering Committee approval shall be subject to the dispute resolution provisions of this Section 2.6. 2.7 STAFF AVAILABILITY. Each party shall make its employees, consultants, subcontractors and investigative sites engaged in the Research Program and the Development Program or serving on any committee available upon reasonable notice during normal business hours at their respective places of employment to consult with the other party on issues arising during the Research Program and the Development Program and in connection with any request from any regulatory agency, including regulatory, scientific, technical and clinical testing issues. 2.8 FACILITY VISITS. Representatives of Lilly and Ligand may, upon reasonable notice during normal business hours, (a) visit the facilities where the Research Program and the Development Program are being conducted and use commercially reasonable efforts to obtain permission to visit facilities where Targretin or Drug Product are or will be manufactured and tested, (b) consult informally, during such visits and by telephone, with personnel for the other party performing work on the Research Program and the Development Program, and (c) with the other party's prior approval, which approval shall not be unreasonably withheld, visit (i) the sites of any experiments or tests being conducted by such party in connection with the Research Program and the Development Program, but only to the extent in each case such experiments or tests relate to Drug Products, and (ii) any manufacturing facility where Targretin or Drug Product are being manufactured. On such visits, an employee of the party conducting the research or development shall accompany the employee(s) of the visiting party. If requested by the other party, Ligand and Lilly shall cause appropriate individuals working on the Research Program and the Development Program to be available for meetings at times and places reasonably convenient to the party responding to such request. ARTICLE 3 CLINICAL DEVELOPMENT PROGRAM 3.1 DEVELOPMENT PLAN. The Joint Program Committee or its designee shall prepare and oversee an overall development plan (the "Development Plan") for the Drug Product which shall describe the proposed toxicology studies, clinical trials, regulatory plans, and other key elements of the development work necessary for completion of development activities through completion of Phase II Clinical Trials. In developing such plan, the Joint 14 16 Program Committee shall take into account Lilly's requirements for the Commercialization Program. To be effective, the Development Plan shall be reviewed by the Alliance Directors Committee and shall be subject to review and approval by the Steering Committee prior to its implementation. Progress towards the goals of the plan shall be reviewed by the Steering Committee on a semi-annual basis. Lilly shall be responsible for the conduct of the Development Program and Ligand shall provide reasonable consultation and advice. The Development Plan is intended as a work plan for the development activities with respect to Drug Products and may be amended from time to time by the appropriate committee. Notwithstanding anything in the Development Plan to the contrary, the rights of the parties with respect to Drug Products shall be governed in all respects by the terms of this Agreement. 3.2 REGULATORY APPROVALS. The parties shall use commercially reasonable efforts consistent with their respective responsibilities hereunder to obtain all necessary Regulatory Approvals. Except where Regulatory Approvals for the Drug Product are legally required to be in Ligand's name, Lilly shall have the sole right to obtain Regulatory Approvals for the Drug Product, which shall be in Lilly's name, and Lilly shall own all submissions in connection therewith. All formulary or marketing approvals for the Drug Product shall also be obtained by and in the name of Lilly. Notwithstanding anything to the contrary herein, Lilly shall handle all matters with drug regulatory agencies concerning Drug Products and shall be the sole contact with such agencies. Nothing in this Section 3.2 shall constitute a limitation on Ligand's right to seek, obtain or own regulatory, marketing or formulary approvals for any product outside the Field. 3.3 DEVELOPMENT COSTS. Lilly shall pay all costs incurred by Ligand after the Effective Date in the Development Program (including those costs related to Regulatory Approvals), except that (a) Ligand shall pay all costs incurred in connection with the completion of clinical protocols L1069DM-01, and pre-clinical protocols 97-2520, 97-3346, 97-7068, 97-7065 and all other clinical and pre-clinical protocols ongoing as of the Effective Date in the Field (the "Protocols"), except for such costs, if any, related to changes in the Protocols requested by Lilly in writing and approved by the Joint Program Committee or the Lilly Alliance Director as an expense to by paid by Lilly, and (b) Ligand shall pay its own costs of providing reasonable consultation and advice to Lilly. The costs to be paid by Lilly shall include all costs incurred by Ligand after the Effective Date in connection with preclinical activities required by the Development Program, except to the extent such services are paid for by "Research Funds" as contemplated by and defined in the Collaboration Agreement. Lilly shall pay Ligand for all expenses incurred pursuant to this Section 3.3 and which are not otherwise paid for with the Research Funds as contemplated by and defined in the Collaboration Agreement as follows: Ligand will be paid for all Ligand employees at the rate of *** for each Scientific Person Year (as defined in the Collaboration Agreement) and all third party costs at Ligand's costs. Ligand shall permit Lilly to review Ligand's records of the hours worked by Ligand employees and the third party costs incurred by Ligand for the purpose of verifying the costs to be paid by Lilly pursuant to this Section 3.3. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 15 17 ARTICLE 4 COMMERCIALIZATION 4.1 COMMERCIALIZATION. All decisions regarding the Commercialization Program, including without limitation pricing and terms of sale and assignment of Ligand personnel allocated under Section 3.1 of the Collaboration Agreement with respect to the Drug Product, shall be determined by Lilly, in its sole discretion; provided, however, that Ligand's participation in the Commercialization Program shall be approved by the Steering Committee, subject to the dispute resolution provisions of Section 2.6, and in no event shall such Ligand participation be disruptive of Ligand programs not funded by Lilly. 4.2 MARKETING PARTNERS FOR DRUG PRODUCT. Lilly shall have the right to appoint one or more Lilly Affiliates and one or more Third Party marketing partners to promote, co-promote, distribute, market or co-market any Drug Product in any country of the world where such an arrangement would be beneficial for pricing approvals or overall market share. In the event Lilly elects to appoint a marketing partner, Lilly shall have the right to supply the Drug Product to such partner at such prices as Lilly shall determine. With the consent of Ligand, which consent will not be unreasonably withheld, Lilly may, in connection with the appointment of a marketing partner, assign to such partner some or all of Lilly's obligations under the Development Program with respect to one or more countries, provided that such assignment shall not release Lilly from any obligations it may have under this Agreement. 4.3 COMMERCIAL DILIGENCE. Lilly shall use commercially reasonable efforts to obtain Regulatory Approval for and to market, sell and distribute Drug Products in all countries of the world. 4.4 OPTION TO DISTRIBUTE LIGAND SYSTEMIC PRODUCTS. Lilly shall have the exclusive option to distribute all Ligand Systemic Products in the United States, the European Union as an entity and Japan (the "Option Territory") for such period of time as Lilly shall have the inchoate or actual obligation to pay Ligand a royalty on Net Sales of Drug Products. For such distribution services, Ligand shall pay Lilly *** of net sales of Ligand Systemic Products, determined in the same manner as Net Sales are calculated pursuant to Section 1.37, substituting therein "Ligand" for "Lilly" wherever such term appears. Each party shall provide written notice (the "Option Notice") to the other party no later than seven (7) months prior to the date the first party estimates in good faith that it will file an application for Regulatory Approval with respect to the first Ligand Systemic Product, in the case of Ligand, or the first Drug Product, in the case of Lilly, in any country in the Option Territory, informing the other party of the estimated filing date for the application. Lilly shall then have a period of thirty (30) days after the date of the Option Notice to exercise its option under this Section 4.4 by delivering a written notice of exercise to Ligand. The option provided hereunder may only be exercised in any or all of the United States, the European Union as an entity and/or Japan and, if Lilly exercises the option, not later than the filing of *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 16 18 an application for Regulatory Approval with respect to the first Drug Product in any country in the Option Territory, Lilly and Ligand shall execute a written distribution agreement providing for Lilly's distribution of Ligand Systemic Products under terms substantially similar to those set forth in this Section 4.4 and Schedule 4.4. 4.5 TARGRETIN MANUFACTURE. If Lilly or any Lilly Affiliate is manufacturing Targretin, Ligand shall have the right to purchase Targretin from Lilly or the Lilly Affiliate pursuant to a written supply agreement in form reasonably satisfactory to the parties, for use in Ligand Systemic Products and Ligand Topical Products. During the Research Program and the Development Program, Lilly will develop a manufacturing plan with the advice and consultation of Ligand. In connection with clinical trials with respect to Drug Products, Lilly anticipates purchasing, and shall have the right to purchase through Ligand, Targretin from Ligand's current suppliers at the price charged to Ligand by its current suppliers plus Ligand's direct order costs, including all material and labor costs, whether direct or reasonably allocated, directly related to Lilly's orders hereunder. Ligand will use commercially reasonable efforts to cause its suppliers to permit quality assurance and quality control inspections of their facilities and otherwise to cooperate with Lilly. Ligand recognizes that Lilly does not intend to use any clinical material that does not meet Lilly quality assurance/quality control standards; accordingly, Ligand will not process any order from Lilly to Ligand's supplier that Ligand reasonably believes would be filled with clinical material that does not meet such standards and will promptly notify Lilly of its failure to process the order. In the event that inadequate supply is available, the parties will agree upon an equitable division of supply. Ligand shall take commercially reasonable efforts to obtain supplies of Targretin for Lilly subject to Ligand's needs to conduct development and commercialization activities outside the Field. For so long as Lilly is purchasing Targretin from Ligand, Lilly shall provide Ligand with rolling annual forecasts of its needs for Targretin on a quarterly basis. 4.6 TRADEMARKS. Lilly shall select one or more trademarks, not likely to cause confusion, mistake or to deceive, with respect to Targretin or such other marks as Ligand selects for the Ligand Systemic Products and/or the Ligand Topical Products to be used in connection with the marketing of the Drug Products. Such trademarks shall be owned solely by Lilly. ARTICLE 5 ROYALTY AND MILESTONE PAYMENTS 5.1 ROYALTIES. (a) Subject to the terms set forth in this Agreement (including, but not limited to, Section 5.1(b) below) and during the Royalty Term, in partial consideration for the licenses 17 19 and services provided hereunder, Lilly shall pay Ligand the following royalties based on worldwide aggregate Net Sales of each Drug Product during a Calendar Year: *** of Net Sales for that portion of Net Sales of the Drug Product in such Calendar Year that are less than *** . *** of Net Sales for that portion of Net Sales of the Drug Product in such Calendar Year that equal or exceed *** but are less than *** . *** of Net Sales for that portion of Net Sales of the Drug Product in such Calendar Year that equal or exceed *** but are less than *** . *** of Net Sales for that portion of Net Sales of the Drug Product in such Calendar Year that equal or exceed *** . Commencing January 1, 1999 and on January 1 of each year thereafter the threshold and ceilings for the different royalty percentages will be increased by *** over the levels in effect during the immediately preceding Calendar Year. No royalty shall be paid on sales by Lilly or any Lilly Affiliate of Ligand Systemic Products. (b) In the event Ligand does not exercise the "Ligand Option" or gives the "Rejection Notice" as provided in Section 1 of the Option Agreement and has not previously exercised the "268/324 Royalty Option" under Section 6.1(b) of the Collaboration Agreement, Ligand shall have the option to increase the royalties payable on Targretin (the "Targretin Royalty Option") by *** of the royalty rates provided in Section 5.1(a) above (e.g., the royalty for that portion of Net Sales in such Calendar Year that are less than *** would be increased from *** ). To exercise the Targretin Royalty Option, Ligand must deliver written notice to Lilly within thirty (30) days after the first to occur of (i) the date Ligand receives (A) the payment of the Phase III Enrollment milestone for Compound 268 (as defined in the Collaboration Agreement) pursuant to Section 7.2 of the Collaboration Agreement or (B) written notice from Lilly acknowledging that the Phase III Enrollment milestone for Compound 268 has been satisfied, (ii) the date Ligand receives (A) the payment of the Phase III Enrollment milestone for Compound 324 (as defined in the Collaboration Agreement) pursuant to Section 7.2 of the Collaboration Agreement or (B) written notice from Lilly acknowledging that the Phase III Enrollment milestone for Compound 324 has been satisfied or (iii) the date Ligand receives (A) the payment of the first Phase III Enrollment milestone for Targretin pursuant to Section 5.4 of this Agreement or (B) written notice from Lilly acknowledging that the first Phase III Enrollment milestone for Targretin has been satisfied. If Ligand does not deliver written notice within the required thirty (30) days, the Targretin Royalty Option shall be deemed to have expired. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 18 20 5.2 ROYALTY PAYMENTS. Royalty payments under this Agreement shall be made to the receiving party within seventy-five (75) days following the end of each Calendar Quarter for which royalties are due. 5.3 ROYALTY TO LILLY. Subject to Section 6.5 of the Collaboration Agreement, if Lilly and its Affiliates terminate development and commercialization of all Drug Products under Section 10.4 after filing an IND or an equivalent application in any Major Foreign Market with respect to a Drug Product and, thereafter, Ligand manufactures, sells or causes to be manufactured or sold the Drug Product, Ligand shall pay Lilly, during the Lilly Royalty Term, a royalty on Net Sales of the Drug Product during each Calendar Year, calculated as provided in Section 1.37, substituting therein "Ligand" for "Lilly" wherever such term appears. The percentage of Net Sales to be paid by Ligand shall vary in connection with the progress Lilly or any Lilly Affiliate shall have made toward obtaining Marketing Approval of the Drug Product as follows: (a) If Lilly or any Lilly Affiliate has not filed an IND or an equivalent application in any Major Foreign Market with respect to the Drug Product, Ligand shall *** of the Drug Product. (b) If Lilly or any Lilly Affiliate has filed an IND or an equivalent application in any Major Foreign Market but has not enrolled and treated a patient in Phase III Clinical Trials with respect to the Drug Product, Ligand shall *** of the Drug Product. (c) If Lilly or any Lilly Affiliate has enrolled and treated a patient in Phase III Clinical Trials but has not filed an NDA or an equivalent application in any Major Foreign Market with respect to the Drug Product, Ligand shall *** of the Drug Product. (d) If Lilly or any Lilly Affiliate has filed an NDA or an equivalent application in any Major Foreign Market with respect to the Drug Product, Ligand shall *** of the Drug Product. 5.4 MILESTONE PAYMENTS. Provided that Lilly has not terminated this Agreement under Section 10.3, upon achievement of any milestone event listed below with respect to a Drug Product, Lilly shall pay a milestone fee to Ligand on or before the seventy-fifth (75th) day following achievement of the milestone as provided below: *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 19 21 Milestone 1 IND Acceptance (other than pursuant *** to the Protocols) 2 Phase III Enrollment *** 3 NDA Acceptance *** 4 Marketing Approval *** Notwithstanding the immediately preceding sentence, unless Lilly terminates this Agreement as provided in Section 10.3 before IND Acceptance,Lilly shall pay the IND Acceptance milestone amount within three (3) Lilly working days after the earlier of: (i) IND Acceptance or (ii) December 15, 1998. The milestone payments set forth above will be paid only for the first indication of the Drug Product to achieve the required status and no milestone payment shall be made more than once with respect to any other formulations or indications of the Drug Product. *** In the event that Phase II Clinical Trials and Phase III Clinical Trials are combined or other doubts exist regarding the achievement of the Phase III Clinical Trials milestone, the Steering Committee or its designee shall determine the point in the trials at which the Phase III milestone has been achieved. Notwithstanding the provisions of Section 2.6 of this Agreement, in the event that the Steering Committee (i) is unable to agree or (ii) is no longer in existence and no designee has been named, the determination shall be made by the mutual agreement of the parties. ARTICLE 6 LICENSES 6.1 LICENSES TO LILLY. Subject to the other provisions of this Agreement, Ligand and its Affiliates hereby grant to Lilly and its Affiliates an exclusive, worldwide license, even as to Ligand and its Affiliates, with the right to grant sublicenses, under Ligand's and its Affiliates' interests in the Joint Patents, Joint Technology, Ligand Patents and Ligand Technology to develop, make, have made, use, have used, import, offer for sale, sell and have sold Drug Products, including the right to sell Targretin to Sublicensees for formulation as Drug Products. Ligand and its Affiliates shall retain all their respective rights under Joint Patents, Joint Technology, Ligand Patents and Ligand Technology not explicitly granted to Lilly and its Affiliates hereunder. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 20 22 6.2 LICENSES TO LIGAND. (a) Subject to the other provisions of this Agreement, Lilly and its Affiliates hereby grant to Ligand and its Affiliates an exclusive, worldwide license, even as to Lilly and its Affiliates, with the right to grant sublicenses, under Lilly's and its Affiliates' interests in the Joint Patents, Joint Technology, Lilly Patents and Lilly Technology to make, have made, use, have used, import, offer for sale, sell and have sold formulations of Targretin for use outside the Field. Notwithstanding the above, neither Lilly nor its Affiliates grant any license under this Section 6.2(a) under the Lilly Patents or the Lilly Technology that was not actually used by Lilly or any of its Affiliates in connection with the research, development or manufacture of Targretin at any time prior to First Commercial Sale. (b) In the event that Lilly terminates this Agreement pursuant to Section 10.3 or terminates development and commercialization with respect to all Drug Products pursuant to Section 10.4, the licenses granted under Section 6.1 to Lilly and its Affiliates shall terminate and Ligand shall have the right to obtain from Lilly and its Affiliates an exclusive, worldwide license, even as to Lilly and its Affiliates, with the right to grant sublicenses, under Lilly's and its Affiliates' interests in the Joint Patents, Joint Technology, Lilly Patents and Lilly Technology to develop, make, have made, use, have used, import, offer for sale, sell and have sold Drug Products. Lilly shall provide written notification of early termination of this Agreement under Section 10.3 or termination of development and commercialization with respect to all Drug Products under Section 10.4, as the case may be, and Ligand shall have ninety (90) days from the receipt of such notification from Lilly to elect to obtain the exclusive license referred to above in this Section 6.2(b). Such election shall be made by written notification to Lilly. If Ligand elects to obtain such an exclusive license, such license shall be granted upon receipt by Lilly of Ligand's written election to obtain such license and shall be subject to the royalty provisions of Section 5.3. Notwithstanding the above, neither Lilly nor its Affiliates grant any license under this Section 6.2(b) under the Lilly Patents or the Lilly Technology that was not actually used by Lilly or any of its Affiliates in connection with the research, development or manufacture of Targretin at any time prior to First Commercial Sale. ARTICLE 7 INFORMATION AND REPORTS 7.1 INFORMATION DISCLOSURE. Promptly after the Effective Date, Ligand shall disclose and make available to Lilly all Ligand Patents and Ligand Technology relating to Targretin. During the Research Program and the Development Program, Lilly and Ligand will disclose and make available to each other promptly (and in any event as soon as it is generally available within their respective organizations) the results of the work conducted in connection with the Research Program and the Development Program, including without 21 23 limitation all structural, preclinical, clinical, regulatory, and other information known by Lilly or Ligand concerning Targretin and Drug Products. Lilly shall own and maintain its database of clinical trial data and adverse drug event information accumulated from all clinical trials of Drug Products for which it was responsible. In the event that Lilly terminates this Agreement pursuant to Section 10.3 or terminates development and commercialization with respect to all Drug Products pursuant to Section 10.4, Lilly will permit Ligand, at no cost to Ligand other than the direct costs of assembling, reproducing and transmitting the data, to make copies of all material information described in the immediately preceding sentence and use such information in connection with Regulatory Approvals. Ligand shall own and maintain its database of clinical trial data and adverse drug event information accumulated from all clinical trials of Targretin outside the Field. Lilly and Ligand each shall have the right, during normal business hours and upon reasonable notice, to inspect and copy all records of the other party to the extent reasonably required for the performance of its obligations under this Agreement (with the party owning the records determining what is reasonably required). Each party shall treat the records and the information of the other party contained therein as Confidential Information and shall not use or disclose such records or information except to the extent permitted by this Agreement. 7.2 COMPLAINTS. Each party shall maintain a record of all complaints it receives with respect to Drug Products or any Ligand product containing Targretin. Except as otherwise provided in Section 7.3, each party shall notify the responsible party in reasonable detail of any complaint received by it and within three (3) days after the event, and in any event in sufficient time to allow the responsible party to comply with any and all regulatory requirements imposed upon it in any country in which the Drug Product is being marketed. 7.3 ADVERSE EVENT REPORTING. Lilly and Ligand agree to provide each other with all information necessary or desirable to comply with the laws and regulations of governmental regulatory authorities with respect to Targretin and Drug Products, as the case may be. In furtherance thereof, Lilly and Ligand agree to develop appropriate adverse experience reporting procedures and to: (a) provide to each other any significant information on Targretin or any Drug Product from preclinical laboratory, animal toxicology and pharmacology studies, as well as serious or unexpected adverse experience reports from clinical trials and commercial experiences with Targretin or a Drug Product. (b) report to one another in such a manner and time so as to enable each party to comply with all governmental laws and regulations in countries for which Regulatory Approval is or will be sought. 7.4 USE OF INFORMATION. Information contained in reports made pursuant to this Article 7 or otherwise communicated between the parties will be subject to the confidentiality provisions of Article 9 below. Lilly may use any information obtained by it (either by its 22 24 own efforts or by disclosure from Ligand) pursuant to this Agreement for the purposes of obtaining Regulatory Approval for Drug Products throughout the world. Each party shall have the right to use the Confidential Information disclosed by the other party without charge, but only to the extent necessary to enable each party to carry out their respective roles defined in this Agreement. 7.5 PUBLICATIONS. During the term of the Research Program, Ligand and Lilly each acknowledge the other party's interest in publishing certain information gathered during the collaboration to obtain recognition within the scientific community and to advance the state of scientific knowledge. Each party also recognizes the mutual interest in obtaining valid patent protection and protecting business interests. The Steering Committee, or its designee, will establish procedures for review of publications that will address the process, timing and criteria for decision while taking into account both Ligand's and Lilly's policies for publication review and approval. The Steering Committee, or its designee (the "Publication Subcommittee"), shall consider each such proposed publication that arises during the term of the Research Program by reviewing an advance draft of all written publications and an abstract of all oral presentations, which shall be submitted not later than 45 days prior to the first submission for publication in the case of written publications and 45 days prior to submission of the abstract to the organizers of the forum at which the oral presentation is to be made. If, within 30 days of receipt of the advance copy of a party's proposed written publication or abstract of a proposed oral presentation, the Steering Committee or its Publication Subcommittee informs such party that its proposed publication or presentation could be expected to have a material adverse effect on any Ligand Patents, Ligand Technology, Lilly Patents, Lilly Technology, Joint Patents or Joint Technology developed or acquired during the term of the Research Program, then such party shall delay such proposed publication or presentation for a period of up to 90 days or, if longer, a commercially reasonable period of time, to enable modifications to the publication or presentation for patent, trade secret, or commercial reasons or to allow for patent(s) preparation and filing of the information involved, if such information pertains to a patentable invention. If any material changes are made to the advance copy prior to publication or presentation, the final version shall be submitted for review by the Steering Committee or the Publication Subcommittee, which shall then have a period of 10 business days to review the final version. If, within 30 days of receipt of an advance copy or within 10 business days of receipt of the final version of a party's proposed publication or presentation, the Steering Committee or the Publication Subcommittee has failed to act with respect to such party's proposed publication or presentation, then such proposed publication or presentation shall be regarded as approved by the Steering Committee and may be published or presented. The disclosure of information that has been previously approved or is not Confidential Information shall not require the review and approval of the Steering Committee under this Section 7.5. 7.6 REGULATORY REPORTING. The parties acknowledge that either or both parties will be required to submit information and file reports with various governmental agencies in 23 25 addition to those contemplated by the preceding sections. Without limiting the generality of Article 3 above, the Joint Program Committee or its designee, with the approval of the Steering Committee, shall establish procedures to be followed by the parties which will facilitate the coordination of the parties in complying with their respective regulatory obligations, and the parties agree to cooperate with each other as necessary to allow each party to comply with its regulatory obligations. Lilly shall coordinate all contacts with regulatory agencies with respect to Drug Products, keeping Ligand appropriately advised of such contacts. Each party shall consult with the other party before responding to any inquiries from regulatory agencies regarding Targretin or the manufacture thereof, provided however, each party may make such communication as required by law. 7.7 SALES REPORTS. (a) During the term of this Agreement and after First Commercial Sale of a Drug Product in any country, Lilly shall furnish or cause to be furnished to Ligand on a quarterly basis a written report or reports covering each Calendar Quarter (each such Calendar Quarter being sometimes referred to herein as a "reporting period") showing (i) the Net Sales of each Drug Product in each country during the Royalty Term by Lilly, its Affiliates, Sublicensees and assigns, and (ii) the royalties which shall have accrued under Article 5 in respect of such sales and the basis for calculating those royalties. With respect to sales of Drug Products invoiced in United States Dollars ("Dollars"), the Net Sales amounts and the amounts due to Ligand hereunder shall be expressed in Dollars. With respect to sales of Drug Products invoiced in a currency other than Dollars, the Net Sales shall be calculated using Lilly's then current standard exchange rate methodology for the translation of foreign currency sales into Dollars. Each quarterly report shall be accompanied by a listing of the exchange rates used in calculating Net Sales covered by such quarterly report. Lilly will at Ligand's reasonable request but not more frequently than once a Calendar Quarter inform Ligand as to the specific exchange rate translation methodology, if any, used for a particular country or countries. In the event that any exchange rate translation methodology changes, Lilly will inform Ligand of the change in the quarterly report next due. Each quarterly report shall be due on the seventy-fifth (75th) day following the close of each reporting period. Lilly shall keep accurate records in sufficient detail to enable the amounts due hereunder to be determined and to be verified by the independent public accountants described hereunder. Lilly shall furnish annually to Ligand appropriate evidence of payment of any tax or other amount required by applicable laws or regulations to be deducted from any royalty payment, including any tax or withholding levied by a foreign taxing authority in respect of the payment or accrual of any royalty. (b) All payments shall be made in Dollars at the time of quarterly reporting. If at any time legal restrictions prevent the prompt remittance of any payments with respect to 24 26 any country where Drug Products are sold, Lilly or its sublicensees or marketing partners shall have the right and option to make such payments by depositing the amount thereof in local currency to Ligand's account in a bank or depository in such country. Upon the written request of Ligand, at Ligand's expense and not more than once in or in respect of any Calendar Year, *** *** *** *** Upon the expiration of thirty-six (36) months following the end of any Calendar Year, the calculation of amounts payable with respect to such fiscal year shall be binding and conclusive upon Ligand, and Lilly and its sublicensees and marketing partners shall be released from any liability or accountability with respect to payments for such year. The report prepared by the independent public accountant, a copy of which shall be sent or otherwise provided to Lilly by such independent public accountant at the same time it is sent or otherwise provided to Ligand, shall contain the conclusions of such independent public accountant regarding the audit and will specify that the amounts paid to Ligand pursuant thereto were correct or, if incorrect, the amount of any underpayment or overpayment. If such independent public accountant's report shows any underpayment, Lilly shall remit or shall cause its sublicensees or marketing partners to remit to Ligand within thirty (30) days after Lilly's receipt of such report, (i) the amount of such underpayment and (ii) if such underpayment exceeds ten percent (10%) of the total amount owed for the Calendar Year then being audited, the reasonable and necessary fees and expenses of such independent public accountant performing the audit, subject to reasonable substantiation thereof. Any overpayments shall be fully creditable against amounts payable in subsequent payment periods. Ligand agrees that all information delivered or subject to review under this Section 7.7 or under any sublicensee or marketing agreement is Confidential Information and that Ligand shall retain all such information in confidence. 7.8 STATUS REPORTS. At any time after the committees referred to in Article 2 cease to exist, Lilly shall, upon request, and not more frequently than semi-annually, provide to Ligand a written report summarizing the activities of Lilly with respect to the Drug Products, the contents of such report to be as set forth on Schedule 7-8. ARTICLE 8 INTELLECTUAL PROPERTY 8.1 PATENTABLE INVENTIONS AND TECHNOLOGY. (a) OWNERSHIP. Lilly will disclose to Ligand all Lilly Technology and Joint Technology and Ligand will disclose to Lilly all Ligand Technology and Joint Technology to the extent developed or acquired during the Research Program and the *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 25 27 Development Program promptly after the disclosing party recognizes the significance thereof unless the same shall have been developed as part of a collaboration with a Third Party, the terms of which prohibit disclosure to the other party. All Ligand Patents and Ligand Technology shall be owned by Ligand, all Lilly Patents and Lilly Technology shall be owned by Lilly and all Joint Patents and Joint Technology shall be owned jointly by Ligand and Lilly, inventorship to be determined in accordance with U.S. laws of inventorship, where applicable. (b) PATENT PROSECUTION. Ligand shall be responsible for preparing, filing, prosecuting, maintaining and taking such other actions as are reasonably necessary or appropriate with respect to the Ligand Patents and any patentable inventions encompassed by Ligand Technology. Lilly shall be responsible for preparing, filing, prosecuting, maintaining and taking such other actions as are reasonably necessary or appropriate with respect to the Lilly Patents, Joint Patents and any patentable inventions based on or arising from Lilly Technology or Joint Technology. Each party will consult the other party with respect to its choice of external patent counsel and will keep that party continuously informed of all material developments relating to the preparation, filing, prosecution and maintenance of patents and patent applications covered by this Agreement. Each party shall endeavor in good faith to coordinate its efforts with those of the other party to minimize or avoid interference with the prosecution of the other party's patent applications. To the extent practicable, each party shall provide the Steering Committee or its designee with a copy of any patent application which first discloses any specific Lilly Technology, Ligand Technology or Joint Technology, prior to filing the first of such applications in any jurisdiction, for review and comment by such committee or its designee. (c) COSTS. Subject to the provisions of subsection (d) below, the party initially responsible for all costs incurred in the preparation, filing, prosecution and maintenance of a patent pursuant to Section 8.1(b) shall bear all costs incurred in the preparation, filing, prosecution and maintenance of such patents; provided, however, that Ligand shall pay *** of all reasonable external expenses incurred by Lilly while prosecuting and maintaining Joint Patents. External expenses will include patent office fees and taxes in connection with the filing, prosecution and maintenance of any patent or patent application and the fees of any outside patent attorneys or agents in connection with the ex parte preparation, filing, prosecution and maintenance thereof. The allocation of such expenses will occur on an annual basis at the end of each Calendar Year, at which time Lilly will provide Ligand with an itemized list of external expenses denominated in Dollars incurred during the previous annual period in prosecuting and maintaining Joint Patents and Ligand will reimburse Lilly's expenses within sixty (60) days of the date of receipt of this itemized list. (d) DISCONTINUANCE OF PATENT PROSECUTION. The party initially responsible for preparation, filing, prosecution and maintenance of a particular Lilly Patent, Ligand Patent or Joint Patent (the "Initial Responsible Party") shall give thirty (30) days advance notice (the *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 26 28 "Discontinuance Election") to the other party of any intention or decision to cease preparation, filing, prosecution and maintenance of that patent (a "Discontinued Patent"); provided, however, that abandonment of a patent application in favor of a continuation or continuation-in-part thereof shall not constitute discontinuance of the parent application. In such case, the other party may elect at its sole discretion to continue preparation, filing and prosecution or maintenance of the Discontinued Patent at its sole expense subject to the prior rights of Third Parties. The party so continuing shall own any such patent or patent application and patents maturing therefrom, subject to the prior rights of Third Parties, and the Initial Responsible Party shall execute such documents and perform such acts as may be reasonably necessary for the other party to file or to continue prosecution or maintenance, including assigning ownership of such patents and patent applications to the party electing to continue. Discontinuance may be on a country-by-country basis or for a patent application or patent series in total. In the event that Lilly exercises its Discontinuance Election with respect to a Discontinued Patent in a particular country, Lilly's license under Section 6.1 with respect to that Discontinued Patent shall terminate with respect to such country. 8.2 INFRINGEMENT CLAIMS BY THIRD PARTIES. (a) In the case of any claim of infringement of a patent owned by a Third Party based upon the making, having made, using, having used, importing, offering for sale, selling or having sold Targretin in a Drug Product, and the patent Covers Targretin per se, or the use of Targretin per se in the treatment of diabetes mellitus, obesity, insulin resistance, dyslipidemia, and cardiovascular disorders associated with diabetes mellitus or insulin resistance, (i) Lilly shall have the right to obtain a license from the Third Party and credit *** of any royalty payable to the Third Party against the royalty payable to Ligand, but in no event will Ligand's royalty each year be reduced by more than *** , or (ii) if Lilly and/or Ligand is sued for infringement by such Third Party, Lilly shall control and defend or settle the action at its expense and shall pay any damages or other monetary awards resulting therefrom, and Lilly shall be entitled to credit *** of such monetary award against the royalties payable to Ligand, but in no event will Ligand's royalty each year be reduced by more than *** . (b) If a claim of infringement is made against Lilly and/or Ligand by a Third Party and that claim is based upon a claim of infringement for use of an assay system or biological material used in an assay system (for example, the co-transfection assay or a gene or protein used therein) which is Ligand Technology and the claim of infringement is not based on a patent claim which covers a compound or its method of use or any other separately patented technology, then (i) Lilly shall have the right to obtain a license from the Third Party and credit *** of any royalty payable to the Third Party against the royalty payable to Ligand arising from the infringing use, but in no event will Ligand's royalty each year be reduced by more than *** , or (ii) if Lilly and/or Ligand is sued for infringement by such Third Party, Ligand shall control and defend or settle the action and Ligand and Lilly shall share equally all expenses of the action and any damages or *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 27 29 other monetary award resulting therefrom. Lilly shall have the right to approve any settlement of any such action, which approval will not be unreasonably withheld. (c) If a claim of infringement is made against Lilly by a Third Party based upon a claim of patent infringement not arising under (a) or (b) above, Lilly shall have the obligation to control and defend or settle the claim at its sole expense (including the payment of any damages, attorneys' fees or other monetary awards). 8.3 INFRINGEMENT CLAIMS AGAINST THIRD PARTIES. (a) Ligand and Lilly each agree to take commercially reasonable actions to protect their respective Patents and Technology from infringement and from unauthorized possession or use. (b) If any Ligand Patent, Ligand Technology, Lilly Patent, Lilly Technology, Joint Patent or Joint Technology is infringed or misappropriated, as the case may be, by a Third Party, the party to this Agreement first having knowledge of such infringement or misappropriation, or knowledge of a reasonable probability of such infringement or misappropriation, shall promptly notify the other in writing. The notice shall set forth the facts of such infringement or misappropriation in reasonable detail. Subject to the rights of Third Parties, the owner of the Patent or Technology shall have the primary right, but not the obligation, to institute, prosecute and control any action or proceeding with respect to infringement or misappropriation of such Patent or Technology by a Third Party using its own counsel and the other party shall have the right, to be represented in such action by its own counsel. The Steering Committee shall determine, or if the Steering Committee is no longer in existence, the parties shall mutually determine, which party shall have the primary responsibility to institute, prosecute, and control any action or proceeding with respect to infringement or misappropriation of Joint Patents or Joint Technology and the other party shall have the right to be represented by its counsel. The costs and expenses of all suits brought by the party having the primary right or responsibility to institute, prosecute, and control such action or prosecution (including the costs and expenses of the other party and its separate counsel, if any, should the other party elect to participate in such action or proceeding) shall be paid *** by Lilly and *** by Ligand and all damages or other monetary awards recovered therein remaining after the pro rata reimbursement of such costs and expenses shall be split (i) *** to Lilly and (ii) *** to Ligand. If the party having the primary right or responsibility to institute, prosecute, and control such action or prosecution fails to do so within a period of one hundred twenty (120) days after receiving notice of the infringement, the other party, subject to the prior rights of any Third Party, shall have the right to bring and control any such action by counsel of its own choice, and the other shall not have the right to participate in such action or proceeding except that such party may be joined as a party plaintiff and, in case of joining, such party agrees to give the other party reasonable assistance and authority to file and to prosecute such suit. All costs and expenses *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 28 30 of any suit brought by the party not having the primary right or responsibility to institute, prosecute and control such action or prosecution (including the costs and expenses incurred by the other party in providing reasonable assistance to the party initiating the action or proceeding) shall be paid, and all damages or other monetary awards recovered therein shall be retained, by the party initiating the action or proceeding. No settlement or consent judgment or other voluntary final disposition of a suit under this Section 8.3 may be entered into without the joint consent of Ligand and Lilly (which consent shall not be unreasonably withheld). 8.4 NOTICE OF CERTIFICATION. Ligand and Lilly each shall immediately give notice to the other of any certification filed under the U.S. Drug Price Competition and Patent Term Restoration Act of 1984 claiming that a Joint Patent, a Ligand Patent or a Lilly Patent is invalid or that any infringement will not arise from the manufacture, use or sale of any Drug Product by a Third Party. If Ligand decides not to bring infringement proceedings against the entity making such a certification with respect to a Ligand Patent, Ligand shall give notice to Lilly of its decision not to bring suit within twenty-one (21) days after receipt of notice of such certification. Lilly may then, but is not required to, bring suit against the party that filed the certification. If Lilly decides not to bring infringement proceedings against the entity making such a certification with respect to a Joint Patent or a Lilly Patent, Lilly shall give notice to Ligand of its decision not to bring suit within twenty-one (21) days after receipt of notice of such certification. Ligand may then, but is not required to, bring suit against the party that filed the certification. Any suit by Lilly or Ligand may be in the name of Lilly or in the name of Ligand, or jointly by Lilly and Ligand, as may be required by law. For this purpose, the party not bringing suit shall execute such legal papers necessary for the prosecution of such suit as may be reasonably requested by the party bringing suit. 8.5 PATENT TERM EXTENSIONS. The parties shall cooperate with each other in gaining patent term extensions and/or supplementary protection certificates wherever applicable to patents Covering Drug Products and for products which Ligand has rights to market outside the Field. The party first eligible to seek extension of such patent shall have the right to do so; provided, that if in any country the first party has an option to extend the patent term for only one of several products, the first party will consult with the other party before making the election. If more than one patent is eligible for extension, the Steering Committee shall agree upon a strategy that will maximize patent protection for Drug Products and for products which Ligand has rights to market outside the Field. All filings for such extensions and certificates shall be made by the party to whom the patent is assigned, provided, however, that in the event that the party to whom the patent is assigned elects not to file for an extension or supplementary protection certificate, such party shall (i) inform the other party of its intention not to file and (ii) grant the other party the right to file for such extension or certificate. 29 31 ARTICLE 9 CONFIDENTIALITY AND NONDISCLOSURE 9.1 CONFIDENTIALITY. Unless otherwise set forth in this Agreement, for a period from the Effective Date until five (5) years following the later of: (a) the termination of this Agreement or (b) if Lilly or one or more of its Affiliates is marketing a Drug Product, the date on which Lilly and its Affiliates cease to market any Drug Product, each party and its respective Affiliates shall maintain in confidence all Confidential Information, and shall not, except as contemplated by this Agreement, disclose Confidential Information or use Confidential Information for its benefit or the benefit of others, without the consent of the disclosing party (the "Disclosing Party"). Documents made available to the receiving party (the "Receiving Party") shall remain the property of the Disclosing Party and shall be returned upon written request of the Disclosing Party, except that one copy of all such information may be retained for legal archival purposes by the Receiving Party. 9.2 AUTHORIZED DISCLOSURE. Each party may disclose Confidential Information for the purpose of making various regulatory filings and complying with applicable governmental regulations, and to sublicensees (potential and actual), marketing partners (potential and actual), consultants and others having a need to know for the purposes of development, manufacture or marketing of Targretin or Drug Products pursuant to this Agreement, provided that such sublicensees, marketing partners, consultants and others shall also agree to appropriate and comparable confidentiality and non-use provisions. In addition, each party shall be entitled to disclose Confidential Information to the extent required by applicable law, orders of courts, regulatory authorities or similar bodies having jurisdiction over the party ("Legal Process"). The Receiving Party shall promptly notify the Disclosing Party of any request or demand by Legal Process for disclosure of Confidential Information. With respect to any disclosure of Confidential Information, including the text of this Agreement, for the purpose of complying with applicable government regulations, the disclosing party shall give the other party an opportunity to review and comment upon the extent of any such disclosure of Confidential Information prior to disclosure. 9.3 NONDISCLOSURE OF AGREEMENT. Neither party shall disclose any information about this Agreement without the prior written consent of the other. Consent shall not be required, however, for (a) disclosures to tax or other governmental authorities or to potential or actual sublicensees, or marketing partners to the extent required or contemplated by this Agreement, provided, that in connection with such disclosure, each party agrees to use its commercially reasonable efforts to secure confidential treatment of such information, (b) disclosures of information for which consent has previously been obtained or (c) information which has previously been publicly disclosed. Each party shall have the further right to disclose the terms of this Agreement as required by applicable law, including the rules and 30 32 regulations promulgated by the Securities and Exchange Commission, and to disclose such information to shareholders or potential investors as is customary for publicly-held companies. Any copy of this Agreement to be filed with the Securities and Exchange Commission shall be redacted to the satisfaction of both parties; provided, in the event that the Securities and Exchange Commission objects to the redaction of any portion of the Agreement after the initial submission, the filing party shall inform the other party of the objections and shall in good faith respond to the objections in an effort to limit the disclosure required by the Securities and Exchange Agreement, but in any event the filing party shall be free to include any portions of the Agreement it deems necessary to respond to the objections in any future filings. Without limiting the generality of the foregoing and except in the circumstance where a party's outside counsel advises the party that immediate disclosure is required, in the event that a Receiving Party intends to disclose Confidential Information as permitted under this Article 9, such a party will provide to the Disclosing Party a copy of the information to be disclosed and an opportunity to comment thereon prior to such disclosure, and, to the extent practicable, consult with the other on the necessity for the disclosure and the text of the proposed release within a reasonable time in advance of the proposed disclosure. Without limiting the generality of this Section 9.3, Ligand may allow Allergan, Inc. ("Allergan") to review a copy of this Agreement, for the sole purpose of complying with Ligand's obligation to Allergan under that certain Amended and Restated Technology Cross License Agreement, dated as of September 24, 1997, among Allergan, Ligand and Allergan Ligand Retinoid Therapeutics, Inc. Any copy of this Agreement disclosed under this Article 9 shall be redacted to the satisfaction of both parties. 9.4 SURVIVAL. The confidentiality obligations of this Article 9 shall survive the termination or expiration of the Agreement. 9.5 PRESS RELEASES. Press releases or other public communication by either party relating to the collaboration contemplated by this Agreement shall be approved in advance by the other party, except for those communications required by law, disclosures of information for which consent has previously been obtained or information which has been previously disclosed, or as otherwise set forth in this Agreement. ARTICLE 10 TERM AND TERMINATION OF AGREEMENT 10.1 TERM. This Agreement shall become effective on the Effective Date and shall continue in effect, unless terminated earlier as described hereunder or by mutual written agreement of the parties, until the later of either: (1) the expiration of the last to expire Lilly Patent, Ligand Patent or Joint Patent Covering a Drug Product; (2) in the event that Lilly or any Lilly Affiliate is developing or marketing a Drug Product in accordance with the terms of this Agreement but there is no issued Lilly Patent, Ligand Patent or Joint Patent Covering a 31 33 Drug Product, then *** from the date of the most recent First Commercial Sale with respect to a Drug Product, if any; or (3) the expiration of the last applicable Data Exclusivity Period with respect to a Drug Product. 10.2 TERMINATION FOR MATERIAL BREACH. Either party shall have the right to terminate this Agreement after ninety (90) days written notice to the other in the event the other is in material breach of this Agreement, unless the other party cures the breach before the expiration of such period of time. Such notice shall set forth in reasonable detail the specifics of the breach. In the event of termination under this Section 10.2 by Lilly, all licenses granted under this Agreement to Lilly and its Affiliates shall not be affected and shall continue in full force and effect, and Lilly and its Affiliates shall have the right to exercise all such licenses (subject to all payment and other surviving obligations as set forth in Section 10.6). All licenses granted under this Agreement to Ligand and its Affiliates shall automatically terminate upon such termination by Lilly. In the event of termination under this Section 10.2 by Ligand, all licenses granted under this Agreement to Ligand and its Affiliates shall not be affected and shall continue in full force and effect, and Ligand and its Affiliates shall have the right to exercise all such licenses (subject to all payment and other surviving obligations as set forth in Section 10.6). All licenses granted under this Agreement to Lilly and its Affiliates shall automatically terminate upon such termination by Ligand. Notwithstanding the foregoing, Lilly shall be permitted to distribute and sell all supplies of Drug Products in its inventory at the time of termination until such supplies are exhausted. 10.3 EARLY TERMINATION. At any time on or before December 15, 1998, Lilly shall have the right to terminate this Agreement upon written notice to Ligand if Lilly determines, for any reason, that it does not wish to proceed with development of any Drug Product. In the event Lilly terminates the Agreement under this Section 10.3, Lilly's and its Affiliates' license (including any royalty obligations related thereto) granted under Section 6.1 shall terminate. The rights granted Ligand and its Affiliates under Section 6.2 shall survive any early termination of this Agreement by Lilly under this Section 10.3. 10.4 TERMINATION OF DEVELOPMENT FOR FAILURE TO MEET GOALS. Ligand acknowledges that the development and commercialization of Drug Products is an inherently uncertain process, and that there can be no assurance either that Drug Products can be successfully developed or that the potential commercial rewards available for the commercialization of Drug Products, when weighed against the costs and uncertainties involved and compared to Lilly's other commercial opportunities, will be sufficient to justify Lilly's continued efforts to develop and/or commercialize Drug Products. After December 15, 1998, if Lilly in good faith concludes that further efforts under this Agreement would not be in the best interests of Lilly, or if Lilly's Portfolio Management Committee or its successor decides to cease work on the Drug Product, Lilly shall so notify Ligand, and the parties shall then promptly meet to explore whether any steps may be taken that would lead Lilly to conclude that further efforts would be justified. In the event the parties are unable to agree to continue efforts within ninety (90) days of Lilly's notice to Ligand provided for above, Lilly 32 *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 34 shall be entitled to terminate further development or commercialization of a Drug Product upon written notice to Ligand and Lilly's and its Affiliates' license (including any royalty obligations related thereto) granted under Section 6.1 with respect to such Drug Product shall terminate. The rights granted Ligand and its Affiliates under Section 6.2 shall survive any early termination of development or commercialization by Lilly under this Section 10.4. 10.5 TERMINATION UPON INSOLVENCY. This Agreement may be terminated by either party upon notice to the other should the other party: (a) consent to the appointment of a receiver or a general assignment for the benefit of creditors, or (b) file or consent to the filing of a petition under any bankruptcy or insolvency law or have any such petition filed against it which has not been stayed within 60 days of such filing. 10.6 ACCRUED RIGHTS, SURVIVING OBLIGATIONS, RESIDUAL RIGHTS. Upon expiration or early termination of this Agreement, except as provided herein to the contrary, all rights and obligations of the parties shall cease, except as follows: (a) obligations to pay royalties and other sums accruing hereunder up to the date of termination; (b) the right to complete the manufacture and sale of Drug Products, which qualify as "work in process" under GAAP or which are in stock at the date of termination, and the obligation to pay royalties on Net Sales of such Drug Products; (c) the obligations to pay milestones and royalties with respect to Drug Products; (d) all provisions regarding confidentiality shall continue in full force and effect; (e) obligations for record-keeping and accounting reports for so long as Drug Products are sold, plus three (3) years. At such time after termination of this Agreement when sales or other dispositions of Drug Products have ceased, Lilly or Ligand, as the case may be, shall render a final report along with any royalty payment due; (f) the parties rights to inspect books and records as described in Article 7; (g) in the event that Lilly terminates this Agreement pursuant to Section 10.3, the obligation to provide information to Ligand pursuant to Section 7.1; 33 35 (h) the obligations of defense and indemnity as described in Article 11; (i) any cause of action or claim of a party accrued or to accrue because of any breach or default by the other party hereunder (subject to applicable statutes of limitation); (j) in the event of expiration of this Agreement under Section 10.1, Lilly shall have a fully paid-up, perpetual license to the rights granted pursuant to Section 6.1 solely with respect to the unpatented Ligand Technology, and Ligand shall have a fully paid-up, perpetual license to the rights granted pursuant to Section 6.2 solely with respect to the unpatented Lilly Technology; and (k) all other terms, provisions, representations, rights and obligations contained in this Agreement that by their sense and content are intended to survive. ARTICLE 11 INDEMNITY 11.1 CLAIMS. Each party hereby agrees to indemnify, defend and hold harmless the other party and its Affiliates, and their respective officers, directors, agents and employees from and against any and all suits, claims, actions, demands, liabilities, expenses and/or losses, including reasonable attorneys' fees and other costs of defense other than claims for patent infringement (which shall be resolved pursuant to Article 8) ("Claims"), (a) resulting directly or indirectly from the manufacture, use, handling, storage, sale or other disposition of Targretin or Drug Products by the indemnifying party, its Affiliates, agents or Sublicensees (other than a party hereunder), but only to the extent such Claims do not result from the negligence or intentional misconduct of the party seeking indemnification, or (b) resulting directly from a breach of any representation or warranty of the indemnifying party contained in Article 12 of this Agreement. 11.2 DEFENSE. Any entity entitled to indemnification under this Article 11 shall give prompt written notice to the indemnifying party of any Claims with respect to which it seeks indemnification, and the indemnifying party shall have the option to assume the defense of such Claims with counsel reasonably satisfactory to the indemnified party. If such defense is assumed by the indemnifying party with counsel so selected, the indemnifying party will not be obligated to pay the fees and expenses of any separate counsel retained by the indemnified party with respect to such Claims. Except with the prior written consent of the indemnified party, which consent shall not be unreasonably withheld, the indemnifying party may not enter into any settlement of such litigation unless such settlement includes an unqualified release of the indemnified party. 34 36 11.3 INSURANCE. Ligand and Lilly shall each have and maintain such type and amounts of liability insurance covering the manufacture, supply, use and sale of Targretin and Drug Products as is normal and customary in the pharmaceutical industry generally for parties similarly situated, and will upon request provide the other party with a copy of its policies of insurance in that regard, along with any amendments and revisions thereto. ARTICLE 12 REPRESENTATIONS AND WARRANTIES Each party hereby represents and warrants to the other party as of the Effective Date as follows: 12.1 CORPORATE EXISTENCE AND POWER. Such party (a) is a corporation duly organized, validly existing and in good standing under the laws of the state in which it is incorporated, and (b) has full corporate power and authority and the legal right to own and operate its property and assets and to carry on its business as it is now being conducted and is contemplated in this Agreement. 12.2 AUTHORIZATION. Such party (a) has the corporate power and authority and the legal right to enter into the Agreement and perform its obligations hereunder, and (b) has taken all necessary corporate action on its part required to authorize the execution and delivery of the Agreement and the performance of its obligations hereunder. The Agreement has been duly executed and delivered on behalf of such party and constitutes a legal, valid, binding obligation of such party and is enforceable against it in accordance with its terms subject to the effects of bankruptcy, insolvency or other laws of general application affecting the enforcement of creditor rights and judicial principles affecting the availability of specific performance and general principles of equity whether enforceability is considered a proceeding at law or equity. 12.3 ABSENCE OF LITIGATION. Such party is not aware of any pending or threatened litigation (and has not received any communication) which alleges that such party's activities related to this Agreement have violated, or that by conducting the activities as contemplated herein such party would violate, any of the intellectual property rights of any other person. 12.4 CONSENTS. All necessary consents, approvals and authorizations of all governmental authorities and other persons or entities required to be obtained by such party in connection with the Agreement have been obtained. 12.5 NO CONFLICT. The execution and delivery of the Agreement and the performance of such party's obligations hereunder (a) do not conflict with or violate any requirement of applicable law or regulation or any provision of articles of incorporation or 35 37 bylaws of such party in any material way, and (b) do not conflict with, violate or breach or constitute a default or require any consent under, any contractual obligation or court or administrative order by which such party is bound. 12.6 PATENTS. Except as such party has otherwise advised the other party in writing, such party represents and warrants to the other that, to the best of its knowledge, it has sufficient legal and/or beneficial title and ownership under its intellectual property rights necessary for it to fulfill its obligations under this Agreement and that it is not aware of any communication alleging that it has violated or by conducting its business as contemplated by this Agreement would violate any of the intellectual property rights of any other person. As used herein, "intellectual property rights" means all patent rights, copyrights, trademarks, trade secret rights, chemical and biological material rights and know-how rights necessary or useful to make, use, import, offer for sale or sell Targretin and/or Drug Products. 12.7 PRIOR DATA. Ligand represents and warrants to Lilly that it has made (or will make) available to Lilly (to the extent the same exists and is material to assessing the commercial, medical, clinical or regulatory potential of Targretin) all toxicology studies, clinical data, manufacturing process data and other information in its possession regarding Targretin that would be reportable to the FDA under 21 C.F.R. 200 et. seq., and that to the best of its knowledge, such data and information is accurate and complete and is what it purports to be. Lilly represents and warrants to Ligand that it will make available to Ligand (to the extent the same exists and is material to assessing the commercial, medical, clinical or regulatory potential of Targretin) all toxicology studies, clinical data, manufacturing process data and other information in its possession regarding Targretin that would be reportable to the FDA under 21 C.F.R. 200 et. seq., and that to the best of its knowledge, such data and information will be accurate and complete and what it purports to be. 12.8 NO DEBARMENT. Such party will comply at all times with the provisions of the Generic Drug Enforcement Act of 1992 and will upon request certify in writing to the other that none of it, its employees, or any person providing services to such party in connection with the collaboration contemplated by this Agreement have been debarred under the provisions of such Act. 12.9 ADDITIONAL REPRESENTATIONS AND WARRANTIES. Ligand hereby agrees to use its commercially reasonable efforts to comply with the terms and conditions of those certain license agreements set forth in Schedule 12.9. In addition, Ligand hereby agrees to timely pay all royalty and milestone payments required to be paid under those certain license agreements set forth in Schedule 12.9 during the Research Program Term and thereafter only as necessary to grant Lilly the licenses granted pursuant to Section 6.1. Ligand hereby represents and warrants to Lilly that to Ligand's knowledge, there is no material unauthorized use, infringement or misappropriation of the Ligand Patents Covering Targretin. 36 38 ARTICLE 13 MISCELLANEOUS PROVISIONS 13.1 GOVERNING LAW. The Agreement shall be governed by the laws of the State of Indiana, without regard to Indiana choice of law provisions. 13.2 DISPUTE RESOLUTION PROCESS. In the event of any dispute relating to this Agreement or the collaborative effort contemplated hereby, the parties shall, prior to instituting any lawsuit, arbitration or other dispute resolution process on account of such dispute, follow the procedures for dispute resolution set forth in Section 2.6 of this Agreement if such dispute relates to the conduct of or decisions made as part of the Research Program or the Development Program. In the event of any dispute relating to or arising from this Agreement which a party does not believe is covered by Section 2.6 and prior to instituting any litigation with respect thereto, the dispute shall be presented to David Robinson or his successor as Chief Executive Officer of Ligand on behalf of Ligand, and August M. Watanabe or his successor as chief scientific officer of Lilly on behalf of Lilly; provided, however, that this provision shall not prevent either party from seeking a preliminary injunction or other equitable relief in the event such party believes it will suffer irreparable harm. These executives shall confer and consider each party's view and shall attempt in good faith to resolve the dispute between themselves or, if they are unable to so resolve the dispute, to establish a mechanism to resolve the dispute promptly and efficiently. In the event said executives are unable to resolve such dispute or agree upon a mechanism to resolve such dispute within thirty (30) days, either party shall be entitled to institute litigation and seek such remedies as may be available. 13.3 NOTICES. All notices required or permitted to be given under this Agreement shall be in writing and shall be deemed given, upon receipt, if mailed by registered or certified mail (return receipt requested), postage prepaid, or sent by overnight delivery (receipt verified) to the address below, or given personally or transmitted by facsimile to the number indicated below (with confirmation). To Lilly: Eli Lilly and Company Lilly Corporate Center Indianapolis, IN 46285 Attention: General Counsel Fax: (317) 276-9152 37 39 To Ligand: Ligand Pharmaceuticals Incorporated 9393 Towne Centre Drive San Diego, CA 92121 Attention: General Counsel Fax: (619) 625-4521 Any party may, by written notice to the others, designate a new address or fax number to which notices to the party giving the notice shall thereafter be mailed or faxed. 13.4 FORCE MAJEURE. If either party's performance hereunder is affected by any extraordinary, unexpected and unavoidable event such as acts of God, floods, fires, riots, war, accidents, labor disturbances, breakdown of plant or equipment, lack or failure of transportation facilities, unavailability of equipment, sources of supply or labor, raw materials, power or supplies, infectious diseases of animals, or by the reason of any law, order, proclamation, regulation, ordinance, demand or requirement of the relevant government or any sub-division, authority or representative thereof, or by reason of any other cause whatsoever (provided that in all such cases the party claiming relief on account of such event can demonstrate that such event was extraordinary, unexpected and unavoidable by the exercise of reasonable care) ("Force Majeure") it shall as soon as reasonably practicable notify the other party of the nature and extent thereof and take all reasonable steps to overcome the Force Majeure and to minimize the loss occasioned to that other party. Neither party shall be deemed to lose any rights under this Agreement or be in breach of this Agreement or otherwise be liable to the other party by reason of any delay in performance or nonperformance of any of its obligations hereunder, except with respect to payment obligations, to the extent that such delay and nonperformance is due to any Force Majeure of which it has notified the other party and the time for performance of that obligation shall be extended accordingly. 13.5 WITHHOLDING TAXES. If either party is required by the United States government or other authorities to withhold any tax on the amounts payable by that party to the other party under this Agreement, that party shall be allowed to do so, and shall in such case remit payments to the other party net of such withheld amount, provided that the withholding party furnishes the other party with reasonable evidence of such withholding payment in electronic or written form as soon as practicable after such withholding in order that the other party may use the withholding tax paid as a tax credit. 13.6 ENTIRE AGREEMENT. This Agreement, its exhibits and schedules, the Confidentiality Agreements between Ligand and Lilly dated September 30, 1996, January 23, 1997 and May 8, 1997, the Collaboration Agreement, the Option Agreement and the Stock Purchase Agreement between Ligand and Lilly of even date herewith sets forth the entire agreement and understanding of the parties relating to the subject matter contained herein and merges all prior discussions and agreements between them. No party shall be bound by any 38 40 representation other than as expressly stated in this Agreement, or by a written amendment to this Agreement signed by authorized representatives of both parties. No termination of the Collaboration Agreement shall terminate this Agreement. Any terms of the Collaboration Agreement referred to in this Agreement shall be deemed incorporated herein by reference and shall survive any termination of the Collaboration Agreement. 13.7 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. 13.8 DISCLAIMER OF AGENCY. This Agreement shall not constitute any party the legal representative or agent of another, nor shall any 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. 13.9 SEVERABILITY. If any term, covenant or condition of this Agreement or the application thereof to any party or circumstance shall, to any extent, be held to be invalid or unenforceable, then (i) the remainder of this Agreement, or the application of such term, covenant or condition to parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Agreement shall be valid and be enforced to the fullest extent permitted by law; and (ii) the parties hereto covenant and agree to renegotiate any such term, covenant or application thereof in good faith in order to provide a reasonably acceptable alternative to the term, covenant or condition of this Agreement or the application thereof that is invalid or unenforceable, it being the intent of the parties that the basic purposes of this Agreement are to be effectuated. 13.10 ASSIGNMENT. Lilly may discharge any obligations and exercise any right hereunder through an Affiliate although Lilly shall remain ultimately responsible for the proper discharge of all obligations hereunder notwithstanding any assignment or delegation to any such Affiliate. References to Lilly shall include any Affiliate of Lilly to whom such an assignment or delegation has been made in accordance with this Agreement. Except as provided in this Section 13.10, or otherwise expressly provided in this Agreement, neither Lilly nor Ligand shall delegate duties of performance or assign, in whole or in part, rights or obligations under this Agreement without the prior written consent of the other party, not to be unreasonably withheld, and any attempted delegation or assignment without such written consent shall be of no force or effect. Without such written consent, either Ligand or Lilly may assign the Agreement and its rights and obligations hereunder in connection with the transfer or sale of all or substantially all of its business, or in the event of its merger or consolidation or change in control or similar transaction. This Agreement shall be binding upon the permitted successors and assigns of the parties. 39 41 13.11 HEADINGS. The headings contained in this Agreement have been added for convenience only and shall not be construed as limiting or defining the content of said sections or paragraphs. 13.12 LIMITATION OF LIABILITY. No party shall be liable to another for indirect, incidental, consequential or special damages, including but not limited to lost profits, arising from or relating to any breach of this Agreement, regardless of any notice of the possibility of such damages. Nothing in this Section is intended to limit or restrict the indemnification rights or obligations of any party. 13.13 INTERPRETATION. This Agreement has been jointly prepared by the parties and their respective legal counsel and ambiguities shall not be strictly construed against either party. 13.14 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. 13.15 COMPLIANCE WITH LAWS. Each party shall, and shall cause its respective Affiliates to, comply in all material respects with all federal, state, local and foreign laws, statutes, rules and regulations applicable to the parties and their respective activities under this Agreement. 13.16 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 to carry out the purposes and intent of this Agreement. [Remainder of this page intentionally left blank] 40 42 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above. ELI LILLY AND COMPANY By: /s/ August M. Watanabe ------------------------------------------ August M. Watanabe Executive Vice President LIGAND PHARMACEUTICALS INCORPORATED By: /s/ David E. Robinson ------------------------------------------ David E. Robinson President and Chief Executive Officer [SIGNATURE PAGE TO DEVELOPMENT AND LICENSE AGREEMENT] 43 SCHEDULE 2.1 TECHNICAL OPERATING PLAN *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 44 Schedule 4.4 This Schedule sets forth the material terms of the distribution agreement to be executed by Ligand and Lilly in the event that Lilly properly exercises its option to distribute all Ligand Systemic Products under Section 4.4 of the Agreement. Capitalized terms used but not defined herein will have the meaning given to them in the Agreement. 1. Ligand shall appoint Lilly as its exclusive distributor of the Ligand Systemic Products for that portion of the Option Territory for which Lilly exercises the Option (the "Lilly Territory"). 2. Lilly shall use its commercially reasonable efforts to distribute, sell and book sales of the Ligand Systemic Products in all countries in the Lilly Territory. Ligand reserves the exclusive right to sell the Ligand Systemic Products to Lilly and to market and promote but not to sell or distribute the Ligand Systemic Products in the Lilly Territory. Lilly shall not distribute or sell the Ligand Systemic Products to any person or entity located or taking delivery outside the Lilly Territory or that Lilly has reason to believe plans to use or sell the Ligand Systemic Products outside the Lilly Territory. 3. Lilly shall establish the price for and distribute, sell and book sales of the Ligand Systemic Products. Lilly shall purchase from Ligand the Ligand Systemic Products at a price equal to *** of the sales price established by Lilly. For orders of the Ligand Systemic Products for the initial commercial sales of the Ligand Systemic Products, and for any subsequent periods in which actual Net Sales may subsequently vary from the prices of the Ligand Systemic Products estimated by Lilly or in effect when the Ligand Systemic Products are ordered or shipped under the distribution agreement, the purchase price and Net Sales amount for purposes of the distribution agreement shall be based upon Lilly's good faith estimate of the Net Sales for the applicable purchase order or period. Subsequently, the actual purchase price paid shall be adjusted on a semiannual basis based upon the most recently available Net Sales information. Lilly shall adjust the purchase price for the Ligand Systemic Products as necessary to reflect actual Net Sales of the Ligand Systemic Products. Any amount due Ligand on account of such adjustments shall be paid by check or wire transfer within fifteen (15) days of the completion of such calculation. 4. Lilly shall drop ship the Ligand Systemic Products to the location specified by Ligand in its orders and bill on a Ligand invoice the third party identified by Ligand. Lilly shall also provide to Ligand no later than seventy-five (75) days after the end of each Calendar Quarter a report showing the sales of the Ligand Systemic Products in each country in the Lilly Territory during the Calendar Quarter and Lilly's inventory of Ligand Systemic Products by item and package size as of the end of the Calendar Quarter certified to be accurate by an officer of Lilly. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 1 45 5. Ligand shall provide to Lilly no later than forty-five (45) days prior to the beginning of each Calendar Quarter a forecast of what Ligand anticipates Lilly's sales of Ligand Systemic Products will be for the Calendar Quarter. Lilly and Ligand shall agree on what is an adequate inventory of the Ligand Systemic Products and Lilly shall purchase from Ligand sufficient quantities to supply demand for the Ligand Systemic Products and maintain an adequate inventory. Lilly shall have the right to return any Ligand Systemic Products that (a) are not in conformance with the specifications or (b) when shipped have an expiry date of less than sixty (60) days from the date of shipment. 6. Lilly shall purchase all of its requirements of Ligand Systemic Products from Ligand and shall pay for the Ligand Systemic Products in full within thirty (30) days of the date of Ligand's invoice. Lilly shall not be entitled to manufacture or have manufactured the Ligand Systemic Products. Lilly shall be entitled to appoint sub-distributors that are part of Lilly's normal distribution network solely for physical distribution of the Ligand Systemic Products. Lilly shall not be entitled to otherwise appoint sub-distributors, other than Lilly Affiliates without first obtaining Ligand's written consent, which consent will not be unreasonably withheld. 7. Lilly shall indemnify and hold Ligand harmless from any and all claims based upon (a) Lilly's activities in connection with, or the death or bodily injury or property damage resulting from, Lilly's handling, storage, distribution or sale of the Ligand Systemic Products (including product liability claims but excluding any claims resulting from Ligand's manufacture, marketing or promotion of the Ligand Systemic Products) or (b) Lilly's negligence or willful misconduct or material breach of the distribution agreement, except in the case of (a) or (b) to the extent the claims result from Ligand's negligence or willful misconduct or material breach of the distribution agreement. Ligand shall indemnify and hold Lilly harmless from any and all claims based upon (a) Ligand's manufacture, marketing or promotion of the Ligand Systemic Products (including product liability claims but only to the extent the claims result from Ligand's manufacture, marketing or promotion of the Ligand Systemic Products), (b) Ligand's activities relating to the Ligand Systemic Products outside the Lilly Territory or (c) Ligand's negligence or willful misconduct or material breach of the distribution agreement, except in the case of (a), (b) or (c) to the extent the claims result from Lilly's negligence or willful misconduct or material breach of the distribution agreement. 8. Ligand shall be responsible for the coordination of all recall activities with respect to the Ligand Systemic Products and shall pay all costs of any recall. 9. The distribution agreement shall be terminable by either party after 60 days written notice in the event of an uncured material breach by the other party. The distribution agreement shall also terminate automatically in the event Lilly terminates all research, development and commercialization with respect to Targretin. 10. Neither party shall be permitted to assign its rights under the distribution agreement without first obtaining the prior written consent of the other party, except in connection with the sale of all or substantially all of a party's assets, whether by merger or otherwise. 2 46 11. The distribution agreement shall contain such other standard terms for the distribution of the Ligand Systemic Products in the Lilly Territory as the parties may mutually agree, which terms shall be consistent with the terms contained in the Option Agreement. 3 47 SCHEDULE 7.8 *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 48 Schedule 12.9 1. The Settlement Agreement, License and Mutual General Release between La Jolla Cancer Research Foundation, SelectRA Pharmaceutical Inc., Allergan Ligand, and Allergan Ligand Retinoid Therapeutics, Inc., effective August 23, 1995. 2. The Amended and Restated Technology Cross License Agreement among Allergan, Inc., Ligand Pharmaceuticals Inc. and Allergan Ligand Retinoid Therapeutics, Inc., effective September 24, 1997. 3. The license agreement between Salk Institute for Biological Studies and Ligand Pharmaceuticals Inc., effective October 20, 1988, and as amended on September 15, 1989, December 1, 1989 and October 20, 1990. 4. The agreements between Insitut Pasteur de Lille and Ligand Pharmaceuticals Inc., effective March 1, 1995 and December 1, 1995. 5. The agreement between Rockefeller and Ligand Pharmaceuticals Inc., effective November 14, 1991. 6. The agreement between Baylor College of Medicine and Ligand Pharmaceuticals Inc., effective March 9, 1992 and September 1, 1992. EX-10.168 5 EXHIBIT 10.168 1 EXHIBIT 10.168 COLLABORATION AGREEMENT AMONG ELI LILLY AND COMPANY AND LIGAND PHARMACEUTICALS INCORPORATED AND ALLERGAN LIGAND RETINOID THERAPEUTICS, INC. DATED NOVEMBER 25, 1997 2 COLLABORATION AGREEMENT THIS COLLABORATION AGREEMENT ("AGREEMENT") is entered into as of November 25, 1997 among ELI LILLY AND COMPANY, an Indiana corporation having its principal place of business at Lilly Corporate Center, Indianapolis, Indiana 46285 ("LILLY"), AND LIGAND PHARMACEUTICALS INCORPORATED, a Delaware corporation having its principal place of business at 9393 Towne Centre Drive, San Diego, California 92121 ("LIGAND"), AND ALLERGAN LIGAND RETINOID THERAPEUTICS, INC., a Delaware corporation having its principal place of business at 9393 Towne Centre Drive, San Diego, California 92121 ("ALRT") RECITALS WHEREAS, Lilly is interested in developing and commercializing pharmaceutical products to treat and prevent medical conditions, including, but not limited to, diabetes mellitus, insulin resistance, obesity, dyslipidemia, and cardiovascular disorders associated with insulin resistance and obesity, and would like to collaborate with Ligand in a research and development effort to determine whether modulators of certain intracellular receptors or transcription factors will be useful in treating these medical conditions; and WHEREAS, Ligand and ALRT, its wholly owned subsidiary, own or control certain patents and technology useful in the collaboration; and WHEREAS, ALRT, Ligand and Lilly believe that each party can bring significant and complementary strengths to a collaboration and wish to proceed in accordance with the terms of the following agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter recited, the parties agree as follows: ARTICLE 1 DEFINITIONS When used in this Agreement, each of the following terms shall have the meanings as set forth below: 3 1.1 "AFFILIATE" shall mean any company or entity controlled by, controlling, or under common control with a party hereto and shall include without limitation any company fifty percent (50%) or more of whose voting stock (or other comparable ownership interest for an entity other than a corporation) is owned or controlled, directly or indirectly, by a party, and any company or entity which owns or controls, directly or indirectly, fifty percent (50%) or more of the voting stock (or other comparable ownership interest for an entity other than a corporation) of a party or equivalent power to direct the management or policies of such company or entity. 1.2 "ALLERGAN" shall mean Allergan, Inc., a Delaware corporation, and its affiliates. 1.3 "ALLERGAN ROYALTY COMPOUND" shall mean an ALRT Compound with respect to which a royalty must be paid by Ligand or ALRT under the ALRT Agreement; provided, however, with respect to Section 7.2, Allergan Royalty Compound shall not include Compound 324 or Compound 268. 1.4 "ALLIANCE DIRECTORS COMMITTEE" shall mean the committee described in Section 2.3. 1.5 "ALRT AGREEMENT" shall mean that certain Amended and Restated Technology Cross License Agreement dated as of September 24, 1997 among Allergan, Ligand and ALRT. 1.6 "ALRT COMPOUND" shall mean a compound which is both (i) a Modulator or a Regulator, and (ii) licensed to Ligand and ALRT pursuant to the ALRT Agreement. 1.7 "ANALOG" shall mean a compound which is structurally closely related to a reference compound in that *** *** *** *** *** *** *** 1.8 "CALENDAR QUARTER" shall mean a quarter ending on March 31, June 30, September 30 or December 31 of each Calendar Year. 1.9 "CALENDAR YEAR" shall mean the twelve month period ending on December 31. 1.10 "COMBINATION PRODUCT" shall mean a Drug Product which, in addition to utilizing a Research Compound, contains another component, which may also be a Research Compound, as a pharmaceutically active ingredient. -2- *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 4 1.11 "COMMERCIALIZATION PROGRAM" shall mean all activities related to the development and commercialization of a Drug Product that occur after Phase III Enrollment including, without limitation, the conduct of Phase III Clinical Trials, activities associated with the preparation, filing and prosecution of an NDA and all activities related to commercialization of a Drug Product. The Commercialization Program shall also include all activities relating to manufacturing, including, without limitation, manufacturing process development and scale-up, chemistry, manufacturing and controls, and related activities regardless of whether they occur before or after Phase III Enrollment, and all research and related activities in support of an NDA that occur after Phase III Enrollment. 1.12 "COMPOUND 268" shall mean that certain compound designated as LGD 268 with the molecular structure shown in Schedule 1.12 attached hereto, and *** *** 1.13 "COMPOUND 324" shall mean that certain compound designated as LGD 324 with the molecular structure shown in Schedule 1.13 attached hereto, and *** *** 1.14 "CONFIDENTIAL INFORMATION" shall mean all information, inventions, know-how and data disclosed by one party to the other party pursuant to this Agreement, including without limitation, information relating to research and development plans, experiments, results and plans, the existence of compounds, therapeutic leads, candidates and products, clinical and preclinical data, trade secrets and manufacturing, marketing, financial, regulatory, personnel and other business information and plans, whether in oral, written, graphic or electronic form and whether in existence as of the Effective Date or developed or acquired in the future, except where such information (i) is public knowledge at the time of disclosure by the disclosing party, (ii) becomes public knowledge through no fault of the receiving party, (iii) was in the possession of the receiving party at the time of disclosure by the disclosing party as evidenced by proper business records or (iv) is disclosed to the receiving party by a Third Party, to the extent such Third Party's disclosure was not in violation of any obligation of confidentiality. 1.15 "COVER" (including variations thereof such as "Covering", "Covered", and "Coverage") shall mean that the manufacture, use, import, offer for sale or sale of a Research Compound, Drug Product, SERM Oncology Product, Discontinued Drug Product or Ligand Option Compound would infringe a Valid Claim; provided, with respect to a process or manufacturing patent, that a Valid Claim therein effectively precludes Third Parties from manufacturing, using, importing, offering for sale or selling Drug Products, SERM Oncology Products, Discontinued Drug Products or Ligand Option Compounds. The determination of whether a Research Compound, Drug Product, SERM Oncology Product, Discontinued Drug Product or Ligand Option Compound is Covered by a particular Valid Claim shall be made on a country by country basis. A Valid Claim shall be deemed to provide effective preclusion hereunder where (i) there is no competing Drug Product, SERM Oncology Product, Discontinued Drug Product or Ligand Option Compound being marketed or (ii) if a Drug Product, SERM -3- *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 5 Oncology Product, Discontinued Drug Product or Ligand Option Compound is being marketed by a competitor, it infringes the Valid Claim (including any period in which, and provided that, the Valid Claim is being litigated). 1.16 "DATA EXCLUSIVITY PERIOD" shall mean the period, if any, during which the FDA, or other equivalent regulatory agency in the case of countries other than the United States, prohibits reference, for purposes of seeking Regulatory Approval, to clinical and other data contained in the Regulatory Approval package relating to a Drug Product, without the consent of the party holding the NDA or equivalent Regulatory Approval. 1.17 "DESIGNATED RECEPTORS" shall mean the RXR, PPAR and HNF-4 receptors, all subtypes, splice forms and variants of each of them. 1.18 "DEVELOPMENT CANDIDATE" shall mean, during the Research Program Term and subject to the dispute resolution provisions of Section 2.5, a Research Compound with respect to which the Joint Program Committee has recommended and the Steering Committee has decided, or during the one (1) year period after the Research Program Term, Lilly has decided, based on toxicology, ADME and preclinical pharmacology findings to proceed to Phase I Clinical Trials for development in the Field. 1.19 "DEVELOPMENT PLAN" shall mean the plan described in Section 2.10. 1.20 "DEVELOPMENT PROGRAM" shall mean those activities with respect to a Research Compound that occur after designation of the Research Compound as a Development Candidate and until Phase III Enrollment. 1.21 "DISCONTINUED DRUG PRODUCT" shall have the meaning assigned thereto in Section 2.12(b). 1.22 "DRUG DELIVERY SYSTEM" shall mean enhancements of a Drug Product related to convenience of administration of the active ingredient such as injectors, pens, inhalers, sustained release formulations or transdermal patches, but not capsules, tablets, gel caps, solutions, normal pharmaceutical excipients or the like. 1.23 "DRUG PRODUCT" shall mean (i) every pharmaceutical formulation containing a Research Compound which has been declared a Development Candidate during the Research Program Term plus one (1) year and which is intended for administration to humans in the Field, (ii) any compound deemed to be a Drug Product pursuant to Section 2.13 and (iii) both Lilly Option Compounds, but shall not include any pharmaceutical composition to which Ligand acquires rights under this Agreement. 1.24 "EFFECTIVE DATE" shall mean the date hereof. -4- 6 1.25 "FDA" shall mean the United States Food and Drug Administration. 1.26 "FIELD" shall mean the discovery, development and commercialization of Drug Products for use in the treatment, palliation, prevention and/or remission of all medical conditions including, but not limited to, diabetes mellitus, insulin resistance, obesity, dyslipidemia, cardiovascular disorders associated with insulin resistance and obesity, but excluding the treatment, palliation, prevention and/or remission of cancer and dermatological disease. 1.27 "FIRST COMMERCIAL SALE" shall mean, in any particular country, the first sale for use by the general public of a particular Drug Product after receipt of Regulatory Approval in that country. 1.28 "GAAP" shall mean U.S. generally accepted accounting principles, consistently applied. 1.29 "HOMOLOG" shall mean *** *** *** *** *** *** 1.30 "IND" shall mean an Investigational New Drug Application as defined in the United States Food, Drug, and Cosmetic Act and applicable regulations promulgated thereunder, as they are amended or supplemented from time to time, or an equivalent application under any successor law or regulations. 1.31 "IND ACCEPTANCE" shall mean the earliest of (i) the filing with the FDA of an IND and the failure by the FDA, within thirty (30) days following filing, to object to the IND or institute a clinical hold, (ii) the removal of the objection or clinical hold referred to in (i) above, if any, or (iii) the acceptance of an equivalent application by the equivalent agency in a Major Foreign Market country. 1.32 "JOINT PATENTS" shall mean all patents, both foreign and domestic (including without limitation, all substitutions, extensions, reissues, renewals, reexaminations, patents of addition, supplementary protection certificates and inventors' certificates thereof), and all patent applications (including provisional applications, divisions, continuations and continuations-in-part), heretofore or hereafter filed or having any legal force in any country together with any patents that have issued or in the future issue therefrom, jointly owned, in whole or in part, or jointly licensed by Ligand or any Ligand Affiliate and Lilly or any Lilly Affiliate. In the circumstance where the addition of new matter to a solely-owned patent application results in a continuation-in-part that is a Joint Patent, only the new matter shall be deemed jointly owned under this Agreement. -5- *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 7 1.33 "JOINT PROGRAM COMMITTEE" shall mean the committee described in Section 2.4(b) of this Agreement. 1.34 "JOINT RESEARCH COMMITTEE" shall mean the committee described in Section 2.4(a) of this Agreement. 1.35 "JOINT TECHNOLOGY" shall mean all tangible or intangible know-how, trade secrets, routes of synthesis, ideas, processes, inventions (whether or not patentable), tests, assays, quality control or other data, clinical and preclinical results, technical information, and any physical, chemical or biological material, or any replication of any part of such material, which are jointly developed or acquired by Ligand or any Ligand Affiliate and Lilly or any Lilly Affiliate. 1.36 "LIGAND COMPOUNDS" shall mean *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** 1.37 "LIGAND OPTION COMPOUND" shall have the meaning as set forth in Section 4.6. 1.38 "LIGAND PATENTS" shall mean all patents, both foreign and domestic (including without limitation, all substitutions, extensions, reissues, renewals, reexaminations, patents of addition, supplementary protection certificates and inventors' certificates thereof), and all patent applications (including provisional applications, divisions, continuations and continuations-in-part), heretofore or hereafter filed or having any legal force in any country, together with any patents that have issued or in the future issue therefrom, owned, in whole or in part, by Ligand or any Ligand Affiliate, or licensed by Ligand or any Ligand Affiliate (with the right to disclose and sublicense and subject to the rights of Third Parties as of the Effective Date) as of the Effective Date, or any such patents and/or applications that are acquired thereafter and which Cover Research Compounds, Drug Products, New Compounds and/or the SERM Oncology Product, but excluding any Joint Patents. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -6- 8 1.39 "LIGAND TECHNOLOGY" shall mean all tangible or intangible know-how, trade secrets, routes of synthesis, ideas, processes, inventions (whether or not patentable or patented), tests, assays, quality control or other data, clinical and preclinical results, technical information, and any physical, chemical or biological material, or any replication of any part of such material, which is owned or controlled (with the right to disclose and sublicense and subject to the rights of Third Parties as of the Effective Date) by Ligand or any Ligand Affiliate as of the Effective Date or acquired on or before the end of the one year period immediately following the end of the Research Program Term, to the extent such Technology relates to the identification, development, manufacture, use, import, offer for sale or sale of Research Compounds, Drug Products, New Compounds and/or the SERM Oncology Product, but excluding any Joint Technology. 1.40 "LILLY COMPOUNDS" shall mean *** *** *** 1.41 "LILLY OPTION COMPOUND" shall have the meaning as set forth in Section 4.6. 1.42 "LILLY PATENTS" shall mean all patents, both foreign and domestic (including without limitation, all substitutions, extensions, reissues, renewals, reexaminations, patents of addition, supplementary protection certificates and inventors' certificates thereof), and all patent applications (including provisional applications, divisions, continuations and continuations-in-part), heretofore or hereafter filed or having any legal force in any country, together with any patents that have issued or in the future issue therefrom, owned, in whole or in part, by Lilly or any Lilly Affiliate, or licensed by Lilly or any Lilly Affiliate (with the right to disclose and sublicense and subject to the rights of Third Parties as of the Effective Date) as of the Effective Date, or any such patents and/or applications that are acquired thereafter and which Cover Research Compounds, Drug Products, the SERM Oncology Product, Discontinued Drug Products and/or Ligand Option Compounds, but excluding any Joint Patents. 1.43 "LILLY TECHNOLOGY" shall mean all tangible or intangible know-how, trade secrets, routes of synthesis, ideas, processes, inventions (whether or not patentable or patented), tests, assays, quality control or other data, clinical and preclinical results, technical information, and any physical, chemical or biological material, or any replication of any part of such material, which is owned or controlled (with the right to disclose and sublicense and subject to the rights of Third Parties as of the Effective Date) by Lilly or any Lilly Affiliate as of the Effective Date or acquired on or before the end of the one year period immediately following the end of the Research Program Term, to the extent such Technology relates to the identification, development, manufacture, use, import, offer for sale or sale of Research Compounds, Drug Products, the SERM Oncology Product, Discontinued Drug Products and/or Ligand Option Compounds, but excluding any Joint Technology. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -7- 9 1.44 "LILLY ROYALTY TERM" shall mean, with respect to a Discontinued Drug Product or Ligand Option Compound (other than an Allergan Royalty Compound) in each country, (a) if the manufacture, use, import, offer for sale or sale of the Discontinued Drug Product or Ligand Option Compound in such country is Covered by a Joint Patent, Lilly Patent or Ligand Patent, the period of time equal to the *** of (i) *** from the date of First Commercial Sale of such Discontinued Drug Product or Ligand Option Compound in such country or (ii) the expiration of the last-to-expire applicable patent in such country; provided, however, if the manufacture, use, import, offer for sale or sale of such Discontinued Drug Product or Ligand Option Compound is Covered only by a Valid Claim of a pending patent application in such country, the Lilly Royalty Term shall expire, except as provided in (b) below, *** from the date of the First Commercial Sale in such country unless (A) the pending patent application Covering such Discontinued Drug Product or Ligand Option Compound issues prior to the end of such *** period, in which case the Lilly Royalty Term shall not expire at the end of such *** period, or (B) the pending patent application Covering such Discontinued Drug Product or Ligand Option Compound issues after the end of such *** period, in which case the Lilly Royalty Term shall expire at the end of such *** period but shall be reinstated from the date the patent issues, or (b) if the manufacture, use, import, offer for sale or sale of such Discontinued Drug Product or Ligand Option Compound in such country is not so Covered by a Joint Patent, Lilly Patent or Ligand Patent, the period of time *** *** in such country. 1.45 "MAJOR FOREIGN MARKET(S)" shall mean Japan, the United Kingdom, France, Germany, Spain, Italy, or the European Union as an entity. 1.46 "MARKETING APPROVAL" shall mean the date on which Lilly, any Lilly Affiliate, Sublicensee or permitted assignee first receives final approval of the labeling letter in the United States or its equivalent in a Major Foreign Market with respect to a particular Drug Product, SERM Oncology Product or Lilly SERM compound referred to in Section 4.4. 1.47 "MODULATOR" shall mean a compound which modulates, i.e., activates or inhibits, a Designated Receptor in a homo- or heterodimer form, including *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -8- 10 *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** 1.48 "NDA" shall mean, with respect to a particular Drug Product, the New Drug Application filed with the FDA pursuant to 21 U.S.C. Section 357 and 21 C.F.R. Section 314 with respect to that Drug Product, as they are amended or supplemented from time to time, or an equivalent application under any successor law or regulations. 1.49 "NDA FILING" shall mean, with respect to a particular Drug Product, the acceptance of an NDA by the FDA or acceptance of an equivalent filing by the equivalent agency in a Major Foreign Market country. 1.50 "NET SALES" shall mean, with respect to a Drug Product or the SERM Oncology Product, the gross amount invoiced by Lilly, a Lilly Affiliate or Lilly Sublicensee to unrelated third parties for the Drug Product or SERM Oncology Product, less: *** *** *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -9- 11 *** *** Such amounts shall be determined from the books and records of Lilly, Lilly's Affiliate or Lilly's Sublicensee which shall be maintained in accordance with GAAP. In the event the Drug Product or SERM Oncology Product is sold in a country as part of a Combination Product, the Net Sales of the Drug Product or SERM Oncology Product, as the case may be, for the purposes of determining royalty payments, shall be determined by multiplying the Net Sales (as defined above in this Section) of the Combination Product by the fraction, A/(A+B) where A is the average sale price of the Drug Product or the SERM Oncology Product for the reporting period when sold separately in finished form and B is the average sale price of the other product(s) sold separately in finished form; *** *** *** *** *** *** *** *** *** *** *** *** *** In the event a Combination Product contains two Drug Products or a Drug Product and a SERM Oncology Product, Net Sales of each Drug Product or the Drug Product and the SERM Oncology Product in the Combination Product shall be separately calculated as follows: (i) if both Drug Products or the Drug Product and the SERM Oncology Product are sold separately in finished form, the Net Sales for each Drug Product or the Drug Product and the SERM Oncology Product in the Combination Product shall be separately calculated by multiplying the Net Sales of the Combination Product by the fraction A/A+B where A is the average sale price of the particular Drug Product or the SERM Oncology Product for which Net Sales is being determined and B is the average sale price of the other Drug Product or the SERM Oncology Product in the Combination Product; *** *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -10- 12 1.51 "NEW COMPOUND" shall mean *** *** *** *** *** *** *** *** 1.52 "NOVEL PROTEIN" shall mean a protein the levels of which can be up-regulated or down-regulated by a Designated Receptor or Regulator and, such up-regulation or down-regulation has the potential to provide a therapeutic benefit in the Field. 1.53 "OBESITY GENE PROMOTER" shall mean the transcriptional control regime of the human obesity gene, described in *** . 1.54 "OPTION AGREEMENT" shall mean that certain Option and Wholesale Purchase Agreement of even date herewith between Ligand and Lilly. 1.55 "PHASE I CLINICAL TRIALS" shall mean small scale human clinical trials conducted in subjects to establish the initial safety profile and pharmacokinetics of a Drug Product. 1.56 "PHASE II CLINICAL TRIALS" shall mean small scale human clinical trials conducted in subjects to collect preliminary data regarding efficacy of a Drug Product in the particular medical condition for which it is being studied, as well as to obtain some indication of the dosage regimen required. 1.57 "PHASE II ENROLLMENT" shall mean the enrollment and treatment of the first subject in Phase II Clinical Trials of a Drug Product. 1.58 "PHASE III CLINICAL TRIALS" shall mean large scale human clinical trials conducted in subjects and intended to generate data concerning the safety and efficacy of a Drug Product in the particular medical condition for which it is being studied sufficient to support registration of the Drug Product with drug regulatory authorities. 1.59 "PHASE III ENROLLMENT" shall mean the enrollment and treatment of the first subject in Phase III Clinical Trials of a Drug Product. 1.60 "POSITION ISOMER" shall mean *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -11- 13 *** *** *** 1.61 "PROGRAM" shall have the meaning set forth in Section 8.4(f) of this Agreement. 1.62 "REGULATOR" *** *** *** 1.63 "REGULATORY APPROVAL" shall mean all authorizations by the appropriate governmental entity or entities necessary for commercial sale of a Drug Product or SERM Oncology Product (including exports) in a jurisdiction in which Lilly or any Lilly Affiliate elects to market the Drug Product or SERM Oncology Product including, without limitation, approval of labeling, price, reimbursement and manufacturing. 1.64 "RESEARCH COMPOUNDS" shall mean *** *** *** *** *** *** *** *** *** *** *** 1.65 "RESEARCH FUNDS" shall have the meaning set forth in Section 3.1 of this Agreement. 1.66 "RESEARCH PROGRAM" shall mean those activities with respect to a Research Compound that occur prior to designation of the Research Compound as a Development Candidate. 1.67 "RESEARCH PROGRAM TERM" shall mean the five (5) year period of the collaboration measured from the Effective Date and any extensions thereof, as provided for in Section 2.8. 1.68 "RESEARCH YEAR" shall mean a twelve-month period during the Research Program Term. The first Research Year shall be deemed to have commenced on the Effective Date. Subsequent Research Years shall commence on the anniversaries of the Effective Date. 1.69 "ROYALTY TERM" shall mean, with respect to a Drug Product and the SERM Oncology Product in each country, (a) if the manufacture, use, import, offer for sale or sale of the Drug Product or the SERM Oncology Product in such country is Covered by a Joint Patent, Lilly Patent or Ligand Patent, the period of time equal to the *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -12- 14 *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** 1.70 "SCIENTIFIC PERSON YEAR" shall mean the equivalent of the scientific work of one Ligand scientist full-time for one year which equates to a total of *** or *** hours per year of scientific work on or directly related to the Research Program and Development Program. Each Ligand scientist billed to the collaboration may be an equivalent of less than or greater than one Scientific Person Year, based on their hours worked, to meet Research Program and Development Program requirements, but no less than *** of the Ligand scientists billed to the Collaboration each Research Year will work on a full-time basis on the Research Program and/or Development Program. Scientific work on or directly related to the Research Program and Development Program to be performed by Ligand employees can include, but is not limited to, experimental laboratory work, recording and writing up results, reviewing literature and references, holding scientific discussions, and attending appropriate seminars and symposia. 1.71 "SCREENING" shall mean conducting any assay, screen or other test using intracellular receptors or other in vitro cell systems or reagents involved in other signal transduction pathways on a compound for the purpose of determining whether such compound functions as a Modulator or a Regulator or testing such compound to confirm activity with a Designated Receptor or the Obesity Gene Promoter or for cross-reactivity with receptors or promoters other than the Designated Receptors or the Obesity Gene Promoter. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -13- 15 1.72 "SERM ONCOLOGY PRODUCT" shall mean a pharmaceutical composition containing a Research Compound, which is a Modulator of the RXR receptor and is developed and approved for use in the treatment, palliation, prevention and/or remission of cancer in combination with a Selective Estrogen Receptor Modulator ("SERM") for which Lilly has received or will seek Marketing Approval in a jurisdiction in which Lilly elects to market the SERM, including, without limitation, approval of labeling, price, reimbursement and manufacturing. 1.73 "STAGE II COMPOUNDS" shall mean Ligand Compounds, New Compounds and Lilly Compounds that are RXR Modulators and are first synthesized or identified as being Modulators within *** after the Effective Date. 1.74 "STAGE III COMPOUNDS" shall mean Ligand Compounds, New Compounds and Lilly Compounds that are RXR Modulators and are first synthesized or identified as being a Modulator after *** after the Effective Date. 1.75 "STEERING COMMITTEE" shall mean the committee described in Section 2.2 of this Agreement. 1.76 "SUBLICENSEE" shall mean (a) a Third Party to which Lilly or any Lilly Affiliate has licensed the right to sell a Drug Product or the SERM Oncology Product or (b) a Third Party to which Lilly or any Lilly Affiliate has granted the exclusive right to promote and distribute a Drug Product or the SERM Oncology Product in the United States, Japan, the United Kingdom, France, Germany, Spain or Italy under an arrangement substantially different from wholesale distributor arrangements typically employed in such countries. 1.77 "TARGRETIN AGREEMENT" shall mean that certain Development and License Agreement (Targretin) of even date herewith between Lilly and Ligand related to the development and commercialization of Targretin. 1.78 "TECHNICAL OPERATING PLAN" shall mean the Research and Development Technical Operating Plan referred to in Section 2.1, as revised from time to time. 1.79 "THIRD PARTY" shall mean any entity which is not a party or Affiliate of any party to this Agreement. 1.80 "TRADEMARKS" shall have the meaning assigned thereto in Section 9.1 of this Agreement. 1.81 "VALID CLAIM" shall mean any claim (a) issued in an unexpired patent which has not been held unenforceable, unpatentable or invalid by a decision of a court or other governmental agency of competent jurisdiction following exhaustion of all possible appeal processes, and which has not been admitted to be invalid or unenforceable through reissue, *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -14- 16 reexamination or disclaimer, or (b) of a pending patent application, so long as such patent application is being diligently prosecuted. ARTICLE 2 COLLABORATION SCOPE AND GOVERNANCE 2.1 PURPOSE AND SCOPE. The parties desire to collaborate in a research program aimed at the identification and development of Research Compounds for use in the Field. Subject to the terms described herein, both Ligand and Lilly shall use their respective commercially reasonable efforts to achieve the goals set forth in this Agreement. Promptly after the Effective Date, Ligand will submit a draft Technical Operating Plan, covering the general subjects set forth on Schedule 2.1. The parties will promptly after submission by Ligand finalize the Technical Operating Plan. Specific research programs provided for in the Technical Operating Plan in addition to those contemplated under the Targretin Agreement are: (a) RXR Modulators, (b) PPAR Modulators, (c) HNF-4 Modulators and (d) Regulators. The governance provisions described herein shall relate to the conduct of the Research Program and Development Program. Lilly shall be solely responsible for governance of the Commercialization Program. The Technical Operating Plan is intended as a work plan summarizing the present plans regarding key activities of the collaboration. It is subject to amendment from time to time by the committees described below. Notwithstanding anything in the Technical Operating Plan to the contrary, the rights of the parties with respect to the collaboration shall be governed in all respects by the terms of this Agreement. 2.2 STEERING COMMITTEE (a) The Research Program and the Development Program shall be conducted under the overall direction of the Steering Committee comprised of four (4) members with two (2) appointed by Ligand and two (2) appointed by Lilly. The Steering Committee established by this Agreement shall be the same committee as the Steering Committee established by the Targretin Agreement. All actions of the Steering Committee with respect to the activities contemplated by this Agreement shall be governed by the terms of this Agreement. The initial members of the Steering Committee shall be (a) for Ligand, D. Robinson and A. Negro-Vilar, and (b) for Lilly, J. Harper and J. Caro. *** *** Either party may change its representatives on the Steering Committee at any time by prior written notice to the other party. The party hosting the meeting of the Steering Committee shall prepare and deliver to the other party one week prior to the meeting the agenda for the meeting. The party hosting the meeting of the Steering Committee shall prepare and deliver to the other party within ten (10) days after the date of such meeting, minutes of the meeting that set forth all decisions of the Steering Committee relating to the Research Program and the Development Program in form and content reasonably acceptable to the other party. Minutes shall be deemed approved unless any member of the *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -15- 17 Steering Committee objects to the accuracy of such minutes in writing to the other party within ten (10) business days of receipt. If a party objects to the minutes and the objection is not resolved, the objection will be deemed a dispute and resolved pursuant to Section 2.5. (b) The purpose of the Steering Committee shall be to make key strategy, policy and resource decisions regarding the Research Program and the Development Program and to carry out its other responsibilities described in this Agreement. The Steering Committee shall meet at least once in each Calendar Quarter, at such times and places as are agreed to by Ligand and Lilly, alternating between San Diego and Indianapolis, or such other locations as the members of the Steering Committee shall agree. Meetings of the Steering Committee may be attended by such other directors, officers and employees of each party as such party deems necessary, and by such consultants and non-employee agents of each party as the members of the Steering Committee may from time to time agree, but only members of the Steering Committee shall have the right to vote at such meetings. The Steering Committee, by unanimous consent, shall have the authority to amend or waive compliance with the provisions of this Agreement relating to the scheduling and conduct of the meetings of all committees established pursuant to this Agreement. Any dispute regarding any such amendment or waiver shall not be subject to the dispute resolution provisions of Section 2.5. 2.3 ALLIANCE DIRECTORS COMMITTEE (a) Promptly after the Effective Date, Lilly and Ligand each shall appoint one of their respective employees (each an "Alliance Director") to coordinate the execution of the Research Program and the Development Program. The Alliance Directors shall be the primary contacts between the parties with respect to the Research Program and the Development Program. Either party may change its designee as the Alliance Director upon prior written notice to the other party. (b) Promptly after the Effective Date, Lilly and Ligand each shall appoint an Alliance Directors Committee to assist the Alliance Directors in the implementation and execution of the Research Program and the Development Program. The Alliance Directors Committee shall consist of both Alliance Directors and two (2) additional voting members, one (1) appointed by Ligand and one (1) appointed by Lilly. Meetings of the Alliance Directors Committee may be attended by Joint Research Committee and Joint Program Committee representatives, as well as consultants and other agents of Ligand and Lilly as are deemed necessary by the Alliance Directors, but only members of the Alliance Directors Committee shall have the right to vote at such meetings. The Alliance Directors Committee shall report to the Steering Committee which shall have the right to review, accept, reject or modify all actions of the Alliance Directors Committee. Either party may change its members of the Alliance Directors Committee upon prior written notice to the other party. (c) *** *** The party hosting the meeting of the Alliance Directors *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -16- 18 Committee shall prepare and deliver to the other party one week prior to the meeting the agenda for the meeting. The party hosting the meeting of the Alliance Directors Committee shall prepare and deliver to the other party within ten (10) days after the date of such meeting, minutes of the meeting that set forth all decisions of the Alliance Directors Committee relating to the Research Program and the Development Program in form and content reasonably acceptable to the other party. Minutes shall be deemed approved unless any member of the Alliance Directors Committee objects to the accuracy of such minutes in writing to the other party within ten (10) business days of receipt. If a party objects to the minutes and the objection is not resolved, the objection will be deemed a dispute and resolved pursuant to Section 2.5. (d) The Alliance Directors Committee shall be responsible for the execution of the Research Program and the Development Program and direction of the Joint Research Committee and Joint Program Committee. It may appoint such other committees or working groups, with such duties and memberships, as it deems appropriate. The Alliance Directors Committee shall have such additional duties and responsibilities as are given to it by the Steering Committee and shall meet with such frequency as is necessary to complete its duties and as may otherwise be required by the Steering Committee. 2.4 JOINT RESEARCH COMMITTEE AND JOINT PROGRAM COMMITTEE (a) Promptly after the Effective Date, Ligand and Lilly through the Alliance Directors Committee shall appoint the Joint Research Committee. The Joint Research Committee will be responsible for the day to day implementation of the Research Program related to Drug Products outlined in the Technical Operating Plan. The Joint Research Committee shall consist of eight (8) voting members, four (4) appointed by Ligand and four (4) appointed by Lilly. Meetings of the Joint Research Committee may be attended by such other directors, officers and employees of each party as such party deems necessary, and by such consultants and non-employee agents of each party as the members of the Joint Research Committee may from time to time agree, but only members of the Joint Research Committee shall be entitled to vote. The Joint Research Committee shall direct the activities of the research teams managing the following research projects: (a) RXR Modulators, (b) PPAR Modulators, (c) HNF-4 Modulators and (d) Regulators. The Joint Research Committee shall report to the Alliance Directors Committee which shall have the right to review, accept, reject or modify all actions of the Joint Research Committee. Any failure of the Alliance Directors Committee to review, accept, reject or modify actions of the Joint Research Committee may be treated as a dispute by the written request of a party and shall thereafter be resolved pursuant to Section 2.5. Either party may change its members of the Joint Research Committee upon prior written notice to the other party. All decisions of the Joint Research Committee shall be unanimous with all members voting. The party hosting the meeting of the Joint Research Committee shall prepare and deliver to the other party one week prior to the meeting the agenda for the meeting. The party hosting the meeting of the Joint Research Committee shall prepare and deliver to the other party within ten (10) days after the date of such meeting, minutes of the meeting that set forth all decisions of the Joint Research Committee relating to the Research Program in form and content reasonably acceptable -17- 19 to the other party. Minutes shall be deemed approved unless any member of the Joint Research Committee objects to the accuracy of such minutes in writing to the other party within ten (10) business days of receipt. If a party objects to the minutes and the objection is not resolved, the objection will be deemed a dispute and resolved pursuant to Section 2.5. (b) Promptly after the Effective Date, Ligand and Lilly through the Alliance Directors Committee shall appoint the Joint Program Committee. The Joint Program Committee will be responsible for the day to day implementation of the Development Program, and will supervise the development teams (e.g., Targretin, Compound 268 and Compound 324 ) related to Drug Product as outlined in the Technical Operating Plan. The Joint Program Committee shall consist of six (6) voting members, two (2) appointed by Ligand and four (4) appointed by Lilly. Decisions of the committee shall be made by majority vote with a quorum for any meeting consisting of all six members, provided, however, that if the Joint Program Committee is unable to act because of a lack of a quorum, either Lilly or Ligand may call a new meeting pursuant to five (5) days written notice at which a quorum shall consist of four (4) members. Meetings of the Joint Program Committee may be attended by such other directors, officers, employees, consultants and other agents of Ligand and Lilly as are deemed necessary, but only members of the committee shall be entitled to vote. As the Alliance Directors Committee reviews and the Steering Committee approves the development of Research Compounds, the Joint Program Committee shall put into place such additional teams as are necessary to proceed with the Development Plan. The Joint Program Committee shall report to the Alliance Directors Committee which shall have the right to review, accept, reject or modify all actions of the Joint Program Committee. Any failure of the Alliance Directors Committee to review, accept, reject or modify actions of the Joint Program Committee may be treated as a dispute by the written request of a party and be resolved pursuant to Section 2.5 Either party may change its members of the Joint Program Committee upon prior written notice to the other party. The party hosting the meeting of the Joint Program Committee shall prepare and deliver to the other party one week prior to the meeting the agenda for the meeting. The party hosting the meeting of the Joint Program Committee shall prepare and deliver to the other party within ten (10) days after the date of such meeting, minutes of the meeting that set forth all decisions of the Joint Program Committee relating to the Development Program in form and content reasonably acceptable to the other party. Minutes shall be deemed approved unless any member of the Joint Program Committee objects to the accuracy of such minutes in writing to the other party within ten (10) business days of receipt. If a party objects to the minutes and the objection is not resolved, the objection will be deemed a dispute and resolved pursuant to Section 2.5. 2.5 DISPUTE RESOLUTION. Any dispute arising from the Joint Research Committee or the Joint Program Committee shall first be presented to the Alliance Directors Committee for resolution. Any dispute arising from the Alliance Directors Committee shall be presented to the Steering Committee for resolution. Any disputes arising from the Steering Committee shall be presented to David Robinson or his successor as Chief Executive Officer of Ligand on behalf of Ligand, and August M. Watanabe or his successor as Chief Scientific Officer of Lilly on behalf of Lilly. These executives shall confer and consider each party's view and shall attempt in good -18- 20 faith to resolve such disagreements between themselves. If the executives cannot promptly resolve such disagreements and if such disagreement relates to the conduct of or decisions made as a part of the Development Program or the Commercialization Program, for example, disagreements regarding the initiation and termination of preclinical tests and clinical trials or the selection of Development Candidates, the matter shall be decided by August M. Watanabe or his successor as Chief Scientific Officer of Lilly. If the dispute relates to the Research Program, the executives shall establish a mechanism to resolve the disagreement promptly and efficiently, without waiving any rights which either party may have under this Agreement, by law or otherwise. Any action requiring Steering Committee approval shall be subject to the dispute resolution provisions of this Section 2.5. 2.6 STAFF AVAILABILITY. Each party shall make its employees, consultants, subcontractors and investigative sites engaged in the Research Program and the Development Program or serving on any committee available upon reasonable notice during normal business hours at their respective places of employment to consult with the other party on issues arising during the Research Program and the Development Program and in connection with any request from any regulatory agency, including those relating to regulatory, scientific, technical and clinical testing issues. 2.7 FACILITY VISITS. Representatives of Lilly and Ligand may, upon reasonable notice during normal business hours, (a) visit the facilities where the Research Program and the Development Program are being conducted and each party will permit, or use commercially reasonable efforts if the manufacture or testing is being performed by a Third Party to obtain permission for, such representatives of the other party to visit facilities where a Research Compound or Drug Product is or will be manufactured or tested, (b) consult informally, during such visits and by telephone, with personnel for the other party performing work on the Research Program and the Development Program, and (c) with the other party's prior approval, which approval shall not be unreasonably withheld, visit the sites of any experiments or tests being conducted by such other party in connection with the Research Program and the Development Program, but only to the extent in each case such experiments or tests relate to Research Compounds or Drug Products. On such visits, an employee of the party conducting the research or development shall accompany the employee(s) of the visiting party. If requested by the other party, Ligand and Lilly shall cause appropriate individuals working on the Research Program and the Development Program to be available for meetings at times and places reasonably convenient to the party responding to such request. 2.8 EXTENSION OF COLLABORATION. Lilly shall have the option to extend the Research Program Term for up to three (3) additional years in one-year increments by giving written notice not later than six (6) months prior to the end of the initial Research Program Term and each one-year extension. Lilly shall specify in such notice the level of Research Funding it will pay to Ligand during the extended term, which shall not be more than the level applicable to the Research Year immediately preceding such one (1) year extension nor less than *** Scientific Person Years without Ligand's consent. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -19- 21 2.9 RESEARCH FEASIBILITY. Each party shall promptly notify the other if it should determine that any part of the Research Program and the Development Program is not feasible or commercially justifiable, and will outline in reasonable detail the reasons therefor and the parties shall mutually determine in good faith whether termination of that portion of the Research Program and Development Program is appropriate under such circumstances. In the event that research activities to be performed by Ligand in accordance with the Technical Operating Plan (the "Research Work") have been unreasonably delayed, Lilly and Ligand shall review Ligand's staffing of the Research Program and Development Program and Ligand shall assign such additional personnel or make such other adjustments as may be reasonably required to complete the Research Work in a timely fashion. Lilly may also undertake such Research Work, at its own expense, if the parties cannot reach mutual agreement regarding such Research Work. Ligand will provide reasonable assistance to Lilly to accommodate its efforts in undertaking the Research Work. 2.10 DEVELOPMENT PLAN. The Joint Program Committee or its designee shall prepare and oversee an overall development plan (the "Development Plan") for the Drug Product which shall describe the proposed toxicology studies, clinical trials, regulatory plans, and other key elements of the development work necessary for completion of development activities through completion of Phase II Clinical Trials. In developing such plan, the Joint Program Committee shall take into account Lilly's requirements for the Commercialization Program. To be effective, the Development Plan shall be reviewed by the Alliance Directors Committee and shall be subject to review and approval by the Steering Committee prior to its implementation, subject to the dispute resolution provisions of Section 2.5. Progress towards the goals of the plan shall be reviewed by the Steering Committee on a semi-annual basis. Lilly shall be responsible for the conduct of the Development Program and Ligand shall provide consultation and advice. The Development Plan is intended as a work plan for the development activities of the collaboration and may be amended from time to time by the appropriate committee. The rights of the parties with respect to the collaboration shall be governed in all respects by the terms of this Agreement. 2.11 REGULATORY APPROVALS. The parties shall use commercially reasonable efforts consistent with their respective responsibilities hereunder to obtain all necessary Regulatory Approvals. Except where Regulatory Approvals are legally required to be in Ligand's name, Lilly or its Affiliates shall have the sole right to obtain Regulatory Approvals for Drug Products, which shall be in Lilly's or its Affiliate's name, and Lilly shall own all submissions in connection therewith. All formulary or marketing approvals for a Drug Product shall also be obtained by and in the name of Lilly or its Affiliates. Notwithstanding anything to the contrary herein, Lilly or its Affiliates shall solely handle all matters with drug regulatory agencies concerning any Drug Product, and shall be the sole contact with such agencies. Nothing in this Section 2.11 shall constitute a limitation on Ligand's right to seek, obtain or own regulatory, marketing or formulary approvals for any pharmaceutical composition to which Ligand acquires rights in the Field under this Agreement as well as any product outside the Field. -20- 22 2.12 TERMINATION OF DEVELOPMENT. (a) Ligand acknowledges that the development and commercialization of Drug Products is an inherently uncertain process, and that there can be no assurance either that the Drug Products can be successfully developed or that the potential commercial rewards available from the commercialization of the Drug Products, when weighed against the costs and uncertainties involved and compared to Lilly's other commercial opportunities, will be sufficient to justify Lilly's continued efforts to discover, develop and/or commercialize the Drug Products. Lilly will devote the same degree of skill and effort to development of Drug Products as it devotes to its own products of similar risk and potential. If Lilly in good faith determines that further efforts under this Agreement, with respect to a particular Research Compound or Drug Product that has begun development, would not be in the best interests of Lilly, Lilly may cease development of such Research Compound or Drug Product. Lilly shall promptly notify Ligand of any election to discontinue development of a Development Candidate or Drug Product hereunder. (b) If Lilly terminates development of a Drug Product under this Section 2.12 (a "Discontinued Drug Product") and Lilly or its Affiliates is not diligently researching, developing or selling another Research Compound or Drug Product that is a Modulator of the same Designated Receptor as the Discontinued Drug Product if the Discontinued Drug Product is a Modulator, or a Research Compound or Drug Product that is a Regulator if the Discontinued Drug Product is a Regulator, Lilly shall transfer back to Ligand all rights to the Discontinued Drug Product and the related Program (including all rights to any IND or other filing related to the Regulatory Approval and the right to reference the relevant Drug Master File with respect to the Discontinued Drug Product) as contemplated by Section 8.2(b), shall use commercially reasonable efforts to promptly provide Ligand with access to all material clinical and preclinical data at no cost to Ligand other than the direct costs of assembling, reproducing and transmitting the data to Ligand and shall grant Ligand the licenses set forth in Section 8.2(b). In the event that Ligand thereafter manufactures, sells or causes to be manufactured or sold such Discontinued Drug Product, Ligand shall pay Lilly, during the Lilly Royalty Term, a royalty on Net Sales of the Discontinued Drug Product during each Calendar Year, calculated as provided in Section 1.50, substituting therein "Ligand" for "Lilly" and "Discontinued Drug Product" for "Drug Product" wherever such terms appear. The percentage of Net Sales to be paid by Ligand shall vary in connection with the progress Lilly shall have made toward obtaining Marketing Approval of the Drug Product as follows: (i) If Lilly has not filed an IND or an equivalent application in any Major Foreign Market with respect to the Discontinued Drug Product, Ligand shall owe *** *** on Net Sales of the Discontinued Drug Product. (ii) If Lilly has filed an IND or an equivalent application in any Major Foreign Market but has not enrolled and treated a patient in Phase III Clinical Trials with respect *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -21- 23 to the Discontinued Drug Product, Ligand shall *** of Net Sales of the Discontinued Drug Product. (iii) If Lilly has enrolled and treated a patient in Phase III Clinical Trials but has not filed an NDA or an equivalent application in any Major Foreign Market with respect to the Discontinued Drug Product, Ligand shall *** of Net Sales of the Discontinued Drug Product. (iv) If Lilly has filed a NDA or an equivalent application in any Major Foreign Market with respect to the Discontinued Drug Product, Ligand shall *** of Net Sales of the Discontinued Drug Product. 2.13 NOVEL PROTEIN PROGRAM. Lilly may, at its option, add one or more research programs directed to the discovery of research targets that are a Novel Protein for use in the Field, unless Ligand is prohibited from engaging in research with Lilly with respect to the Novel Protein under the terms of an existing collaboration with a Third Party. To the extent Lilly desires that Ligand personnel provide services in connection with such program, the Steering Committee shall determine whether it is feasible to staff such program with existing Scientific Person Years funded by Lilly, or whether additional Scientific Person Years funding is required. Any compound resulting from such research program that Lilly develops shall be deemed to be a Drug Product, and Lilly shall pay royalties and milestones to Ligand *** *** *** *** *** *** *** *** *** *** *** *** *** *** ARTICLE 3 FUNDING PROGRAM 3.1 STAFFING AND FUNDING. Lilly shall provide research funds (the "Research Funds") for the Research Program and Development Program and Ligand shall during each Research Year assign to the Research Program and Development Program sufficient personnel to provide no less than the number of Scientific Person Years reflected in the schedule below. At least *** of the Scientific Person Years shall be provided by scientists with a Ph.D. or M.D. degree or *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -22- 24 equivalent academic credentials. Ligand shall, from time to time, consult with Lilly regarding assignment of Ligand personnel to the Research Program and Development Program and shall consider in good faith any changes suggested by Lilly. Ligand shall not, to the disadvantage of the Research Program and Development Program, transfer personnel from the professional staff engaged in the Research Program and Development Program to participate in another program. The amount of Research Funds to be paid by Lilly shall be *** per Scientific Person Year *** . Commencing January 1, 1999 and on January 1 of each year thereafter, the amount to be paid by Lilly per Scientific Person Year will be increased by *** over the amount applicable to the immediately preceding Calendar Year. The following table shows the allocation of research scientists presently contemplated by the parties. The resources shown in the table for Targretin will support the further development of Targretin as contemplated by the Targretin Agreement. The Steering Committee, from time to time, may reallocate such resources as it deems appropriate.
RESEARCH YEAR 1 2 3 4 5 *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** Total *** *** *** *** ***
3.2 SCHEDULING PAYMENT OF RESEARCH FUNDS. Research Funds during the Research Program Term shall be paid to Ligand by Lilly in United States Dollars by any bank wire transfer in next day funds.*** *** *** *** *** *** Any payment for part of a quarter shall be prorated. Any variance of expected Scientific Person Years from actual Scientific Person Years will be adjusted with the next payment following the end of each Research Year. 3.3 ACCOUNTING. Ligand shall maintain complete records of all monies paid by Ligand under the Research Program and Development Program. During the Research Program Term, Ligand shall submit to Lilly within seventy-five (75) days following each Calendar Quarter a written statement accompanied by a certificate signed by the chief financial officer or controller *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -23- 25 of Ligand setting forth the name of each Ligand employee who worked on the Research Program and the Development Program during that Calendar Quarter, the functional department in which each such employee worked and the actual number of Scientific Person Years each such employee worked during that Calendar Quarter. Lilly shall be entitled to any tax credits due on account of research and development expenses, to the extent permitted by law, for the Research Funds or any other funds paid by Lilly. Lilly may, at its own expense, obtain an audit of such report by independent certified public accountants designated by Lilly and reasonably acceptable to Ligand. Such a request shall be made within one year from receipt of the reports. The independent certified public accountant shall have the right to examine all records kept pursuant to this Section and shall report to Lilly the findings of said examination of records insofar as necessary to verify the reports. Such findings shall be maintained in confidence by Lilly. To the extent that the hours of scientific work Lilly has paid for through Research Funds in any Research Year (number of Scientific Person Years multiplied by 1,880 hours) have not been completed. Ligand shall credit Lilly at the rate provided in Section 3.1 per uncompleted hour. If credit is owed to Lilly, the credit may be taken against the next payment due to Ligand, or in the event that the Research Program Term has expired, within seventy-five (75) days of such termination by wire transfer. If credit is owed to Ligand, the credit may be taken in the next payment due Ligand; provided, however, in no event shall Ligand be entitled to actual cash reimbursement for excess hours completed nor shall any credit owed to Ligand carry forward from one Research Year to the next Research Year. Any unpaid credit after the Research Program Term shall be paid to Lilly by wire transfer within forty-five (45) days after the final Calendar Year report regarding the Research Program and Development Program is due to be delivered to Lilly. 3.4 RESEARCH PROGRAM AND DEVELOPMENT PROGRAM COSTS. Ligand shall pay all expenses incurred by it pursuant to the Research Program and shall not be entitled to any payment therefor except the Research Funds and the milestones and royalties provided herein. If Lilly requests any modification to the Technical Operating Plan as it relates to the Research Program or additional activities which Ligand anticipates will cause it to incur expenses in excess of the Research Funds, Ligand shall so advise Lilly, and Ligand shall not be obligated to provide such services unless the services are approved by the appropriate committee or the Lilly Alliance Director agrees in writing to pay such expenses. *** *** *** *** *** *** *** *** *** *** Lilly shall be responsible for its own costs in providing consultation, advice and research efforts to support the Research Program and the Development Program. Services of Third Parties, such as academic collaborators and contract laboratories utilized in the Research Program and the Development Program must be approved by the Steering Committee and any *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -24- 26 payment by Ligand for such services will be reimbursed at cost. Ligand will pay the costs of providing advice and consultation. Lilly shall be responsible for all costs of the Commercialization Program, except that Ligand shall provide reasonable advice or other assistance at its expense. 3.5 RESEARCH PROGRAM AND DEVELOPMENT PROGRAM DURING DEVELOPMENT. In the event that Lilly is pursuing the development of a Research Compound, Ligand and Lilly shall regularly confer, with the objective of reaching agreement, on what further research under the Research Program and the Development Program is most appropriate in light of Lilly's development efforts with respect to such Research Compound. The parties acknowledge that a principal focus of the Research Program and Development Program under these circumstances shall be to coordinate research activities with Lilly's development activities so as to commercialize a Drug Product as expeditiously as reasonably practicable. From time to time, Lilly may request that, to the extent practicable, Ligand shift personnel allocated under Section 3.1 above from one project to another project or support research activities directed to the advancement of development of Drug Products. 3.6 REDUCTION IN FUNDING. The parties may agree, from time to time, to end or reduce funding on a Program by Program basis, if they believe that such research efforts are not as productive as they had intended. The Steering Committee may also determine that resources used in one Program should be allocated to another Program. Lilly, in its sole discretion and by providing not less than six (6) months prior written notice to Ligand, may reduce its payment of Research Funds in the *** Research Year by up to *** Scientific Person Years from the level funded in the *** Year and, in the *** Research Year by up to *** *** Scientific Person Years from the level funded in the *** Research Year. ARTICLE 4 ADDITIONAL ASPECTS OF RESEARCH PROGRAM AND DEVELOPMENT PROGRAM 4.1 SCREENING LILLY COMPOUNDS. During the Research Program Term, Lilly shall have the right to submit to Ligand for Screening such Lilly Compounds as it deems appropriate. Lilly may also use any Ligand Technology licensed to Lilly under this Agreement at Lilly facilities for Screening compounds in the Field. The scheduling of Screening and other research activity shall be determined by the Steering Committee or the Alliance Directors Committee. Ligand will not subject any Lilly Compound to any binding or other assay or test which has not been specifically approved by the Steering Committee or other appropriate committee. No royalty or other fee shall be paid or payable by Lilly for the Screening of Lilly Compounds unless the Lilly Compound becomes a Drug Product for which milestones or royalties are owing. If a Lilly Compound reaches the status equivalent to a Development Candidate within one (1) year after the end of the Research Program Term, royalty and other payments will be paid as set *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -25- 27 forth in this Agreement. If a Lilly Compound does not reach the status equivalent to a Development Candidate within one (1) year after the end of the Research Program Term, Lilly shall have the right to develop and commercialize such compound or product without the obligation to make royalty and other payments set forth in this Agreement. 4.2 TREATMENT OF LILLY COMPOUNDS. Ligand will not chemically or physically analyze or have analyzed any Lilly Compound to determine its structure and shall not permit any Third Party to observe or have access to any Lilly Compound without the express written consent of Lilly. Lilly will provide to Ligand all information related to, including information regarding the structure of, all Lilly Compounds which upon Screening show the ability to activate or inhibit a Designated Receptor or up-regulate or down-regulate the expression of a coding gene under control of the Obesity Gene Promoter that is material to Ligand's activities hereunder, except to the extent Lilly is legally prohibited as of the Effective Date from disclosing such information. All information, results or data generated in connection with any Screening of a Lilly Compound submitted by Lilly shall be deemed Lilly Technology. All information provided to Ligand in connection with such Screening shall be treated in the manner proscribed in Article 12. Lilly will provide Ligand with handling instructions and all safety information relating to any Lilly Compound submitted by Lilly and access to such other information as is useful to facilitate Ligand's Screening activities. 4.3 SCREENING OF LIGAND COMPOUNDS AND NEW COMPOUNDS. Ligand shall submit all Ligand Compounds and New Compounds, and Lilly shall submit all New Compounds, for Screening. The compounds to be screened, the schedule for such screening and the tests used shall be determined by the Joint Research Committee or other appropriate committee established under this Agreement. All information, results or data generated in connection with any such Screening conducted by Ligand shall be deemed Ligand Technology. All information, results or data generated in connection with any Screening conducted by Lilly shall be deemed Lilly Technology. The Research Committee shall have the option, from time to time, to submit to Ligand and Lilly a list of compounds by name and structure and each party shall promptly notify the Research Committee if, to its knowledge, a royalty obligation would be owing if any compound identified on the list were commercialized. 4.4 SERM ONCOLOGY PRODUCT. (A) LILLY RIGHT. During the Research Program Term and for one (1) year thereafter, Lilly shall have the right to select *** Research Compounds that are Allergan Royalty Compounds or New Compounds that are RXR Modulators for use in a SERM Oncology Product, subject to Ligand's selection rights under Section 4.5. In the event a SERM Oncology Product *** selected does not receive Regulatory Approval or if Lilly, in its sole discretion, terminates development of such SERM Oncology Product, Lilly shall have the right to select *** additional Research Compounds that are Allergan Royalty Compounds and/or New Compounds that are RXR Modulators for use in a SERM Oncology Product. *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -26- 28 *** *** *** *** *** *** *** The Research Compound used in the SERM Oncology Product may be developed for any indication in the Field but shall not be developed or marketed for any indication outside the Field other than as the SERM Oncology Product. Milestones and royalties for the Research Compound used in the SERM Oncology Product shall be as provided in Sections 7.2 and 6.1 for the applicable RXR Modulator. In addition, if such Research Compound is also developed for use other than in combination with a SERM, Ligand shall also be entitled to any milestones and royalties payable pursuant to Section 7.2 and 6.1 with respect to such other use of the Research Compound; provided, however, that in no event shall more than one royalty be paid with respect to the same Net Sales. Lilly shall be solely responsible for all research and development activities relating to the development of a SERM Oncology Product and costs related thereto, and shall not provide Research Funds to Ligand with respect to such SERM Oncology Product. Ligand shall use commercially reasonable efforts to provide to Lilly, at no cost to Lilly other than the direct costs of assembling, reproducing and transmitting the data, information already in Ligand's possession, and shall provide such reasonable assistance to Lilly as Lilly agrees to pay for at a reasonable rate to be agreed, to facilitate Lilly's research efforts with respect to the SERM Oncology Product. (b) CO-PROMOTION OPTION. Ligand shall have the option to co-promote the SERM Oncology Product to physicians in the United States who are board certified or eligible in the medical specialties of oncology and/or hematology. Lilly shall notify Ligand within ninety (90) days prior to any anticipated NDA Filing with respect to a SERM Oncology Product and provide Ligand with a reasonably detailed summary of the relevant scientific and commercial information related to the SERM Oncology Product. Within sixty (60) days of delivery of such notice, Ligand shall notify Lilly whether it will exercise its co-promotion option. If Ligand elects to exercise its option, Lilly and Ligand shall negotiate in good faith reasonable terms and conditions under which Ligand will co-promote the SERM Oncology Product,*** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -27- 29 (c) CO-DEVELOPMENT FUNDING OPTION. Ligand shall have the option to co-fund the worldwide development of the SERM Oncology Product. Lilly shall fund the development of such product until Phase II Enrollment. No later than ninety (90) days prior to initiation of Phase II Clinical Trials for the SERM Oncology Product, Lilly shall provide Ligand with a reasonably detailed summary of all preclinical and clinical data along with an estimate of all remaining costs required to obtain Regulatory Approval for the SERM Oncology Product and a budget for such costs. Ligand shall then have ninety (90) days following receipt of the information described above in which to advise Lilly, in writing, that it intends to exercise its co-funding option. If Ligand exercises its option, Ligand shall then be responsible for *** *** of all further costs incurred by Lilly in obtaining Regulatory Approval for use in the treatment, palliation, prevention and/or remission of cancer based on funding levels of *** per full time equivalent (inflated in the manner provided for funding of Ligand Scientific Person Years in Section 3.1) and Lilly's reasonable additional expenses in every market where marketing is contemplated. Lilly shall provide to Ligand semi-annually each year in the months of March and September an update of the budget of all remaining costs required to obtain Regulatory Approval for the SERM Oncology Product and shall allow Ligand to, at its own expense, obtain an audit by independent certified accountants designated by Ligand and reasonably acceptable to Lilly of expenses incurred. If, in obtaining Regulatory Approval with respect to the SERM Oncology Product, Lilly combines the clinical trials relating to use in cancer with clinical trials relating to use for other indications, the parties shall agree on the portion of such expenses which relate to use in cancer. Lilly shall bill Ligand for its portion of expenses in arrears within thirty (30) days of the end of each Calendar Quarter. Ligand shall pay Lilly in U.S. Dollars by any bank wire transfer within thirty (30) days of receiving Lilly's invoice. If Ligand does not exercise its co-funding option within the ninety (90) day period: (i) Ligand shall be deemed to have waived its rights to co-develop the SERM Oncology Product, (ii) Lilly shall remain responsible for funding and obtaining Regulatory Approval for such SERM Oncology Product, and (iii) Lilly shall pay Ligand royalties and milestones as set forth in Section 4.4(a). If Ligand co-funds the development of the SERM Oncology Product, as contemplated by this Section 4.4(c), Lilly shall pay Ligand, in addition to any royalty described in Section 4.4(a), *** of that portion of such royalty applicable to sales of the SERM Oncology Product for use in the treatment, palliation, palliation, prevention and/or remission of cancer ("Oncology Portion"). If the SERM Oncology Product receives Regulatory Approval for uses in addition to the treatment, palliation, prevention and/or remission of cancer, the Oncology Portion will be determined by the mutual agreement of the parties. If the parties cannot agree on the determination of the Oncology Portion, the parties shall agree upon an appropriate survey mechanism to be utilized to determine the Oncology Portion. The survey will be conducted as follows: A statistical expected accuracy of *** will be considered sufficient for each registered indication (all non-registered indications will be considered as one group and the *** accuracy threshold shall be applied to the group as a whole). The survey will be done in a manner that minimizes cost while providing the desired level of accuracy. This may mean that the survey is conducted differently in each country. Eligible methods of surveying end use include the following plus any others agreed upon by the parties: (i) use of an independent third party to do random surveys of customers; (ii) use of coupons or incentives for customers *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -28- 30 to track use in their institution; (iii) inclusion of coupons or incentives in the vial or case packaging for customers to track use in their institutions; (iv) use of telephone surveys of customers; and (v) logical deduction from the customer list (e.g., product purchased by oncologists or hematologists will be assumed to have been purchased for use in the treatment, palliation, prevention or remission of cancer). The first survey will be conducted promptly after the end of the first full Calendar Quarter in which sales of the SERM Oncology Product are made and triennially thereafter, and the cost of these surveys will be shared equally by the parties. Either party may conduct surveys more frequently at its own expense (using a methodology approved by the other party, whose approval shall not be unreasonably withheld), but no more frequently than one time per calendar year. Regardless of the time that has elapsed since the last survey, the time period to be examined will be the most recently completed three (3) month period for which marketing information is available at the time the survey is commenced. If, at the time of the survey, marketing information is not available for a three (3) month period, the survey will be delayed until such information is available; provided, however, that if the information is not available within ninety (90) days after the end of any Calendar Quarter, the survey for the most recent three (3) month period will be used. The Oncology Portion determined by the agreement of the parties or by the survey will be binding on the parties. The amount of the additional royalty due under this Section 4.4(c) shall be calculated by multiplying any royalty described in Section 4.4(a) by the Oncology Portion most recently set by agreement of the parties or the survey, as the case may be. 4.5 LIGAND RIGHTS TO SELECT COMPOUNDS OUTSIDE THE FIELD. Promptly following the Effective Date, Ligand shall disclose to Lilly all information with respect to the Allergan Royalty Compounds that Lilly may reasonably request. Within the first ninety (90) days following the Effective Date, Ligand shall have the right to select *** Allergan Royalty Compounds (other than Compound 268 and Compound 324) for use outside the Field, in which case such Allergan Royalty Compounds shall not be available for development by Lilly or its Affiliates in the Field. The Steering Committee shall approve the selection of Allergan Royalty Compounds by Ligand, such approval not to be unreasonably withheld. Any dispute arising at the Steering Committee with respect to the selection of such compounds shall be subject to resolution under Section 2.5 in the manner provided for Research Program disputes. The compounds so selected shall not be available to Lilly or its Affiliates and will not be subject to royalty and milestone payments to Lilly. All Allergan Royalty Compounds other than the *** selected by Ligand shall be available to Lilly and its Affiliates exclusively and may not be developed by Ligand or its Affiliates for any purpose during the Research Program Term plus one (1) year, subject to Ligand's and its Affiliates' rights under Section 2.12(b), 4.6(b), 8.1(b), 8.2(b) and 8.5(f) and subject to any license granted to Lilly under Section 8.1 with respect to Allergan Royalty Compounds that become Drug Products or the SERM Oncology Product. 4.6 OPTION COMPOUNDS (a) LILLY OPTION COMPOUNDS. Ligand shall on a quarterly basis share information with Lilly with respect to the status of its internal research or other programs related *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -29- 31 to development of RXR Modulators outside the Field (to the extent any agreements to which Ligand is a party as of the Effective Date do not prohibit Ligand from disclosing the information to Lilly ). At the time the third of *** compounds from Ligand's internal research efforts on RXR Modulators outside the Field or other programs related to RXR Modulators outside the field has reached a stage after the Effective Date that is equivalent to Development Candidate, Ligand shall so notify Lilly and Lilly shall have up to ninety (90) days from receipt of such notice to select for use in the Field up to *** compounds (other than Ligand Option Compounds or Allergan Royalty Compounds selected by Ligand under Section 4.5) synthesized in the course of such internal research or other programs. The compounds so selected by Lilly shall be deemed Research Compounds and shall be referred to as a "Lilly Option Compounds." Lilly shall have the sole right to develop Lilly Option Compounds for use in the Field. Neither Ligand nor any Ligand Affiliate shall have any right to develop any Lilly Option Compound for any use, whether in or outside the Field. If a Lilly Option Compound is further developed and commercialized, milestone payments and royalty payments on such Lilly Option Compound shall be paid by Lilly with respect to the development and commercialization of such compound in a manner equivalent to those set forth in Sections 6.1 and 7.2 with respect to Drug Products containing HNF-4 Modulators, regardless of the date upon which the milestones are achieved and whether or not the Lilly Option Compounds are declared a Development Candidate during the Research Program Term plus one (1) year. If at the end of the Research Program Term plus one year Lilly has not selected *** compounds, it shall be permitted to make its selection at that time, regardless of whether Ligand has brought forward *** compounds to a stage equivalent to Development Candidate. (b) LIGAND OPTION COMPOUNDS. At the time the *** Research Compounds has reached the status of Development Candidate, Ligand shall have up to ninety (90) days to select up to *** other compounds (other than Lilly Option Compounds and any Allergan Royalty Compounds chosen for the SERM Oncology Product) from Allergan Royalty Compounds and/or New Compounds that are RXR Modulators for use outside the Field. The compounds so selected by Ligand shall be deemed "Ligand Option Compounds." Ligand shall have the sole right to develop Ligand Option Compounds for use outside the Field. Neither Lilly nor any of its Affiliates shall have any right to develop any Ligand Option Compound for any use, whether in or outside the Field. If a Ligand Option Compound is further developed and commercialized, milestone payments and royalty payments on such Ligand Option Compound shall be paid by Ligand with respect to the development and commercialization of such compound in a manner equivalent to those set forth in Sections 6.1 and 7.2 with respect to Drug Products containing HNF-4 Modulators, regardless of the date upon which the milestones are achieved, provided no milestone or royalty payments shall be due under this Section if the Ligand Option Compound is an Allergan Royalty Compound. If at the end of the Research Program Term plus one year Ligand has not selected *** compounds, it shall be permitted to make its selections at that time, regardless of whether Lilly has brought forward any Development Candidates. Other than the right to select Ligand Option Compounds as provided in this Section 4.6(b) and the right to New Compounds that are Discontinued Drug Products as provided in this *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -30- 32 Agreement, Ligand shall have no right under this Agreement to research, develop, make, use, import, offer for sale or sell any New Compound. ARTICLE 5 COMMERCIALIZATION 5.1 COMMERCIALIZATION. All decisions regarding the Commercialization Program for each Drug Product, including pricing and terms of sale and assignment of Ligand personnel allocated under Section 3.1 above with respect to the Drug Product, shall be determined by Lilly, in its sole discretion; provided, however, that Ligand's participation in the Commercialization Program shall be approved by the Steering Committee, subject to the dispute resolution provisions of Section 2.5, and in no event shall such Ligand participation be disruptive of Ligand programs not funded by Lilly. 5.2 MARKETING PARTNERS FOR DRUG PRODUCT. Lilly shall have the right to appoint one or more Third Party marketing partners to promote, co-promote, distribute, market or co-market any Drug Product in any country of the world where such an arrangement would be beneficial for pricing approvals or overall market share. In the event Lilly elects to appoint a marketing partner, Lilly shall have the right to supply the Drug Product to such partner at such prices as Lilly shall determine. With the consent of Ligand, which consent will not be unreasonably withheld, Lilly may, in connection with the appointment of a marketing partner, assign to such partner some or all of Lilly's obligations under the Development Program with respect to one or more countries, provided that such assignment shall not release Lilly from any obligations it may have under this Agreement. 5.3 COMMERCIAL DILIGENCE. Lilly shall use commercially reasonable efforts to obtain Regulatory Approval for and to market, sell and distribute Drug Products in all countries of the world. ARTICLE 6 ROYALTIES 6.1 ROYALTIES. (a) Subject to the terms and conditions of this Agreement (including, but not limited to, Section 6.1(b) below) and during the Royalty Term, in partial consideration for the licenses and services provided hereunder, Lilly shall pay Ligand the following royalties based on -31- 33 worldwide Net Sales of each Drug Product incorporating one of the following Research Compounds during a Calendar Year:
ROYALTY TIER I II III IV Allergan Royalty Compound *** *** *** *** Stage II Compounds *** *** *** *** Stage III Compounds *** *** *** *** HNF-4 Modulator *** *** *** *** PPAR Modulator *** *** *** *** Regulator *** *** *** ***
I: Percentage of Net Sales paid for that portion of Net Sales of each Drug Product in the Calendar Year that are less than *** . II: Percentage of Net Sales paid for that portion of Net Sales of each Drug Product in the Calendar Year that equal or exceed *** but are less than *** . III: Percentage of Net Sales paid for that portion of Net Sales of each Drug Product in the Calendar Year that equal or exceed *** but are less than *** . IV: Percentage of Net Sales paid for that portion of Net Sales of each Drug Product in the Calendar Year that equal or exceed ***. Commencing January 1, 1999 and on January 1 of each year thereafter the threshold and ceilings for the different royalty tiers will be increased by *** over the levels in effect during the immediately preceding Calendar Year. Royalties shall be calculated on a Drug Product by Drug Product basis, and sales of various Drug Products shall not be aggregated for purposes of determining the applicable royalty rate. For this purpose, all formulations of a Research Compound shall be regarded as one Drug Product. (b) In the event Ligand does not exercise the "Ligand Option" or gives the "Rejection Notice" as provided in Section 1 of the Option Agreement and has not previously exercised the "Targretin Royalty Option" under Section 5.1(b) of the Targretin Agreement, Ligand shall have the option to increase the royalties payable on either Compound 268 or Compound 324 (but not both) (the "268/324 Royalty Option") by *** *** over the royalty rates *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -32- 34 provided in Section 6.1(a) above (i.e., the royalty rate would increase from *** To exercise the 268/324 Royalty Option, Ligand must deliver written notice to Lilly within thirty (30) days after the first to occur of (i) the date Ligand receives (A) the payment of the Phase III Enrollment milestone for Compound 268 pursuant to Section 7.2 of this Agreement or (B) written notice from Lilly acknowledging that the Phase III Enrollment milestone for Compound 268 has been satisfied, (ii) the date Ligand receives (A) the payment of the Phase III Enrollment milestone for Compound 324 pursuant to Section 7.2 of this Agreement or (B) written notice from Lilly acknowledging that the Phase III Enrollment milestone for Compound 324 has been satisfied or (iii) the date Ligand receives (A) the payment of the first Phase III Enrollment milestone for Targretin (as defined in the Targretin Agreement) pursuant to Section 5.4 of the Targretin Agreement or (B) written notice from Lilly acknowledging that the first Phase III Enrollment milestone for Targretin has been satisfied. If Ligand does not deliver written notice within the required thirty (30) days, the 268/324 Royalty Option shall be deemed to have expired. 6.2 PAYMENTS REGARDING CERTAIN COMPOUNDS. Ligand shall pay Allergan any royalty or other amount payable with respect to any Allergan Royalty Compound. 6.3 ROYALTY PAYMENTS. Royalty payments under this Agreement shall be made to the receiving party within seventy-five (75) days following the end of each Calendar Quarter for which royalties are due. 6.4 PAYMENTS FOR LICENSED PPAR MODULATORS. In the event that Lilly exercises its option to license a PPAR Modulator from a Third Party pursuant to Section 8.5(c) of this Agreement and such compound is used in a Combination Product with a Research Compound or Targretin, Net Sales of the Combination Product shall be calculated as set forth in Section 1.50 of this Agreement or Section 1.37 of the Targretin Agreement, as the case may be, *** *** *** *** *** *** *** *** ARTICLE 7 INITIAL AND MILESTONE PAYMENTS 7.1 INITIAL PAYMENT. Within three (3) business days of the submission by Ligand of the draft Technical Operating Plan to the Steering Committee, Lilly shall pay Ligand twelve million five hundred thousand dollars ($12,500,000). *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -33- 35 7.2 MILESTONES. Upon achievement of any milestone event listed below with respect to a Drug Product, Lilly shall pay Ligand on or before the *** day following achievement of the milestone as provided below:
DEVELOPMENT IND Phase II Phase III NDA Marketing CANDIDATE Acceptance Enrollment Enrollment Filing Approval Allergan Royalty Compound *** *** *** *** *** *** Compound 268/ Compound 324 *** *** *** *** *** *** Stage II Compound *** *** *** *** *** *** Stage III Compound *** *** *** *** *** *** HNF-4 Modulator *** *** *** *** *** *** PPAR Modulator *** *** *** *** *** *** Regulator *** *** *** *** *** ***
Amounts shown on the above table are in millions of U.S. dollars. The milestone payments set forth above will be paid only for the first indication of a Drug Product to achieve the required status and no milestone payment shall be made more than once with respect to the same Drug Product. For purposes of paying milestones, all formulations of a Research Compound shall be regarded as the same Drug Product. *** *** *** In the event that Phase II Clinical Trials and Phase III Clinical Trials are combined or other doubts exist regarding the achievement of such milestones, the Steering Committee or its designee shall determine the point in the trials at which the Phase II Enrollment and Phase III Enrollment milestones have been achieved. Notwithstanding the provisions of Section 2.5 of this Agreement, in the event that the Steering Committee (i) is unable to agree or (ii) is no longer in existence and no designee has been named, the determination shall be made by the mutual agreement of the parties. ARTICLE 8 LICENSES 8.1 LICENSES TO LILLY. (a) Subject to the other provisions of this Agreement (including, without limitation, Section 8.1(b)) and except as provided below, Ligand and its Affiliates hereby grant to Lilly and its Affiliates an exclusive, worldwide license, with the right to sublicense, the *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -34- 36 exclusivity being even as to Ligand and its Affiliates, under the Joint Patents, Joint Technology, Ligand Patents and Ligand Technology: (i) to make, have made, use, have used, import, offer for sale, sell and have sold, the SERM Oncology Product as provided in Section 4.4; (ii) to make, have made, use, have used, import, offer for sale, sell and have sold, Drug Products; (iii) to make, have made, use, have used, import, offer for sale, sell and have sold, New Compounds for which Lilly has disclosed in writing to Ligand the chemical and physical structure not later than *** days after Lilly's receipt of a written request for such disclosure made by Ligand at any time after the end of the Research Program Term *** ; and (iv) to co-exclusively with Ligand and its Affiliates, with the right to sublicense, conceive, discover, evaluate, identify, characterize, research and develop the SERM Oncology Product, Research Compounds in the Field and Drug Products during the Research Program Term *** ; provided that Ligand shall exercise its rights hereunder solely in connection with the performance of its obligations under this Agreement and shall not sublicense its rights hereunder; and (v) to exclusively research and develop in the Field after the Research Program Term plus one (1) year Research Compounds which are declared to be Development Candidates during the Research Program Term *** . Lilly shall exercise the licenses granted pursuant to this Section 8.1(a) only in accordance with the terms of this Agreement. (b) All rights to Ligand Compounds which are not New Compounds, other than those declared to be Development Candidates during the Research Program Term plus one (1) year and those, if any, that are selected as Lilly Option Compounds pursuant to Section 4.6(a), shall revert to Ligand following the Research Program Term *** . In addition, the licenses granted to Lilly and its Affiliates in Section 8.1(a) do not extend and are subject to Allergan's rights to Unsynthesized Compounds and Allergan Selected Compounds (each as defined in the ALRT Agreement) to which Allergan has exclusive rights under the ALRT Agreement. *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -35- 37 *** *** *** After the Research Program Term *** , Ligand shall have the right to conduct research using Research Compounds which are declared to be Development Candidates during the Research Program Term *** . 8.2 LICENSES TO LIGAND. (a) Subject to the other provisions of this Agreement, Lilly hereby grants to Ligand an exclusive, worldwide license, with the right to sublicense, the exclusivity being even as to Lilly and its Affiliates, under the Joint Patents, Joint Technology, Lilly Patents and Lilly Technology to make, have made, use, have used, import, offer for sale, sell and have sold drug products containing Ligand Option Compounds for use outside the Field. (b) In the event Lilly discontinues development of a Discontinued Drug Product pursuant to Section 2.12 of this Agreement and Lilly or its Affiliates is not diligently researching, developing or selling another Research Compound or Drug Product that is a Modulator of the same Designated Receptor as the Discontinued Drug Product if the Discontinued Drug Product is a Modulator, or another Research Compound or Drug Product that is a Regulator if the Discontinued Drug Product is a Regulator, the licenses granted to Lilly and its Affiliates under Section 8.1 with respect to such Discontinued Drug Product and the related Program (and any Research Compound contained in such Drug Product or Program) shall terminate and Lilly and its Affiliates shall grant to Ligand an exclusive, worldwide license, with the exclusivity being even as to Lilly and its Affiliates, with the right to sublicense, under the Joint Patents, Joint Technology, Lilly Patents and Lilly Technology to develop, make, have made, use, import, offer for sale, sell and have sold the Discontinued Drug Product (and any Research Compound contained in such Discontinued Drug Product); provided, however, that Lilly shall retain the exclusive license to any New Compounds other than the Discontinued Drug Products and the Ligand Option Compounds, that may have been synthesized or identified as part of the Program. If Lilly elects to discontinue development of a Discontinued Drug Product, such license shall be granted upon receipt by Ligand of Lilly's written election to discontinue development and shall be subject to the royalty provisions of Section 2.12. Notwithstanding the above, neither Lilly nor its Affiliates grant any license under this Section 8.2(b) under the Lilly Patents or the Lilly Technology applicable to making a Drug Product that was not used to make the Drug Product in the development or commercialization of the Drug Product by Lilly or its Affiliates. 8.3 DEVELOPMENT OUTSIDE FIELD. Neither Ligand nor its Affiliates shall develop any Research Compound or Drug Product, including a SERM Oncology Product, for use or sale outside the Field for so long as Lilly or any Lilly Affiliate or Sublicensee is developing, manufacturing, or selling such Research Compound or Drug Product, including the SERM Oncology Product. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -36- 38 8.4 ROYALTIES ON NEW COMPOUNDS. *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** 8.5 EXCLUSIVITY. *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -37- 39 *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -38- 40 *** *** (f) Subject to Section 3.6, Lilly shall have the right, pursuant to Section 2.12 of this Agreement or otherwise, to terminate all Research Funds for any of the RXR Program, the PPAR Program, the HNF-4 Program and/or the OB Gene Program (each, a "Program"). In the event that Lilly terminates all Research Funds for a Program without Ligand's agreement, (i) all rights to the Program shall revert to Ligand, subject to obligations imposed herein, (ii) all licenses from Ligand and its Affiliates to Lilly and its Affiliates affecting the Program shall terminate, except that Lilly shall retain all licenses under Section 8.1(a)(ii), 8.1(a)(iv) and 8.1(a)(v) with respect to Research Compounds that were declared to be Development Candidates in the Program prior to termination of all Research Funds for the Program, and (iii) the exclusivity covenants of both Ligand and Lilly contained in this Section 8.5 with respect to the Program shall terminate. If all Research Funds for a Program are terminated by the mutual agreement of Lilly and Ligand, Lilly's rights to the Program and its licenses affecting the Program shall not terminate and the exclusivity covenants of both Ligand and Lilly contained in this Section 8.5 with respect to the Program shall not terminate. If Ligand requests from Lilly a report on the status of a Program, Lilly will promptly report to Ligand whether it has discontinued the development and/or commercialization of all Research Compounds and Drug Products in the Program. Notwithstanding the foregoing, Lilly shall retain the exclusive license under Section 8.1(a)(iii) to any New Compounds, other than any New Compound contained in a Discontinued Drug Product and any Ligand Option Compounds that are New Compounds. ARTICLE 9 TRADEMARKS 9.1 SELECTION; LICENSE; EXPENSES. Lilly may select one or more trademarks, as it deems appropriate, but not one which could be reasonably expected to be likely to cause confusion, mistake or to deceive with respect to Targretin, for the marketing of Drug Products. Such trademarks shall be owned solely by Lilly (collectively, the "Trademarks"); provided, however, that if required by law in any country, Ligand shall own the Trademarks in that country and shall grant an exclusive license to Lilly. Expenses for registration of the Trademarks shall be borne solely by Lilly. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -39- 41 ARTICLE 10 INFORMATION AND REPORTS 10.1 INFORMATION DISCLOSURE. Lilly and Ligand will disclose and make available to each other promptly (and in any event as soon as it is generally available within their respective organizations) the results of the work conducted in connection with the Research Program and Development Program, including without limitation all structural, preclinical, clinical, regulatory, and other information known by Lilly or its Affiliates or Ligand or its Affiliates concerning Research Compounds and Drug Products. Lilly shall own and maintain its database of clinical trial data and adverse drug event information accumulated from all clinical trials of the Drug Products for which it was responsible. In the event that Lilly terminates this Agreement or Ligand acquires rights to a Discontinued Drug Product, Lilly will permit Ligand, at no cost to Ligand other than the direct costs of assembling, reproducing and transmitting the data, to make copies of all material information described in the immediately preceding sentence and use such information in connection with Regulatory Approvals; provided, however, that if Ligand subsequently sublicenses the right to develop and market the Discontinued Drug Product to any Third Party, Ligand shall reimburse Lilly for its direct costs incurred in obtaining such information, including, without limitation, the direct costs of clinical trials. Ligand shall own and maintain its database of clinical trial data and adverse drug event information accumulated from all clinical trials of drug products containing Research Compounds outside the Field. Lilly and Ligand each shall have the right, during normal business hours and upon reasonable notice, to inspect and copy all records of the other party to the extent reasonably required for the performance of its obligations under this Agreement (with the party owning the records determining what is reasonably required). Each party shall treat the records and the information of the other party contained therein as Confidential Information and shall not use or disclose such records or information except to the extent permitted by this Agreement as well as to provide to the sponsor of the IND, NDA, or other regulatory submission, for initial and/or periodic submission to governmental agencies, significant information on any Drug Product from preclinical laboratory, animal toxicology and pharmacology studies, as well as serious or unexpected adverse experience reports from clinical trials and commercial experiences with such Drug Product. 10.2 COMPLAINTS. Each party shall maintain a record of all complaints it receives with respect to Drug Products. Except as otherwise provided in Section 10.3, each party shall notify the responsible party in reasonable detail of any complaint received by it and within three (3) days after the event, and in any event in sufficient time to allow the responsible party to comply with any and all regulatory requirements imposed upon it in any country in which the Drug Product is being marketed. 10.3 ADVERSE EVENT REPORTING. The party who has responsibility for and sponsorship of the regulatory submission will also have responsibility for submitting information and filing reports to various governmental agencies, to the extent they are lawfully required, on Drug -40- 42 Products. Information must be submitted at the time of initial filing for investigational use in humans and at the time of NDA filing in the U.S., or the foreign equivalent of any such filing. In addition, supplemental information must be provided on Drug Products at periodic intervals and adverse drug experiences must be reported at more frequent intervals depending on the severity of the experience. Consequently, Lilly and Ligand agree to provide each other with all information necessary or desirable to comply with the laws and regulations of governmental regulatory authorities in the applicable country and to develop and follow appropriate adverse experience reporting procedures and: (a) provide to the sponsor of the IND, NDA, or other regulatory submission, for initial and/or periodic submission to governmental agencies, significant information on any Drug Product from preclinical laboratory, animal toxicology and pharmacology studies, as well as serious or unexpected adverse experience reports from clinical trials and commercial experiences with such Drug Product. (b) report to one another in such a manner and time so as to enable each party to comply with all governmental laws and regulations in countries for which Regulatory Approval is or will be sought. 10.4 USE OF INFORMATION. Information contained in reports made pursuant to this Article 10 or otherwise communicated between the parties will be subject to the confidentiality provisions of Article 12 below. Lilly may use any information obtained by it (either by its own efforts or by disclosure from Ligand) pursuant to this Agreement for the purposes of obtaining Regulatory Approval for Drug Products throughout the world. Each party shall have the right to use the Confidential Information disclosed by the other party without charge, but only to the extent necessary to enable each party to carry out their respective roles defined in this Agreement. 10.5 PUBLICATIONS. During the Research Program Term, Ligand and Lilly each acknowledge the other party's interest in publishing certain information gathered during the collaboration to obtain recognition within the scientific community and to advance the state of scientific knowledge. Each party also recognizes the mutual interest in obtaining valid patent protection and protecting business interests. The Steering Committee, or its designee, will establish procedures for review of publications that will address the process, timing and criteria for decision while taking into account both Ligand's and Lilly's policies for publication review and approval. The Steering Committee, or its designee (the "Publication Subcommittee"), shall consider each such proposed publication that arises during the Research Program Term by reviewing an advance draft of all written publications and an abstract of all oral presentations, which shall be submitted not later than 45 days prior to the first submission for publication in the case of written publications and 45 days prior to submission of the abstract to the organizers of the forum at which the oral presentation is to be made. If, within 30 days of receipt of the advance copy of a party's proposed written publication or abstract of a proposed oral presentation, the Steering Committee or its Publication Subcommittee informs such party that its -41- 43 proposed publication or presentation could be expected to have a material adverse effect on any Ligand Patents, Ligand Technology, Lilly Patents, Lilly Technology, Joint Patents or Joint Technology developed or acquired during the Research Program Term, then such party shall delay such proposed publication or presentation for a period of up to 90 days or, if longer, a commercially reasonable period of time, to enable modifications to the publication or presentation for patent, trade secret, or commercial reasons or to allow for patent(s) preparation and filing of the information involved, if such information pertains to a patentable invention. If any material changes are made to the advance copy prior to publication or presentation, the final version shall be submitted for review by the Steering Committee or the Publication Subcommittee, which shall then have a period of 10 business days to review the final version. If, within 30 days of receipt of an advance copy or within 10 business days of receipt of the final version of a party's proposed publication or presentation, the Steering Committee or the Publication Subcommittee has failed to act with respect to such party's proposed publication or presentation, then such proposed publication or presentation shall be regarded as approved by the Steering Committee and may be published or presented. The disclosure of information that has been previously approved or is not Confidential Information shall not require the review and approval of the Steering Committee under this Section 10.5. 10.6 REGULATORY REPORTING. The parties acknowledge that either or both parties will be required to submit information and file reports with various governmental agencies in addition to those contemplated by the preceding sections. Without limiting the generality of Sections 2.10 and 2.11 above, the Joint Program Committee or its designee, with the approval of the Steering Committee, shall establish procedures to be followed by the parties which will facilitate the coordination of the parties in complying with their respective regulatory obligations, and the parties agree to cooperate with each other as necessary to allow each party to comply with its regulatory obligations. Lilly shall coordinate all contacts with regulatory agencies with respect to Drug Products and the SERM Oncology Product keeping Ligand appropriately advised of such contacts. Each party shall consult with the other party before responding to any inquiries from regulatory agencies regarding Research Compounds or Drug Products, provided however, each party may make such communication as required by law. 10.7 SALES REPORTS. (a) During the term of this Agreement and after First Commercial Sale of a Drug Product or the SERM Oncology Product in any country, Lilly shall furnish or cause to be furnished to Ligand on a quarterly basis a written report or reports covering each Calendar Quarter (each such Calendar Quarter being sometimes referred to herein as a "reporting period") showing (i) the Net Sales of each Drug Product and the SERM Oncology Product in each country during the Royalty Term by Lilly, its Affiliates, Sublicensees and assigns, and (ii) the royalties which shall have accrued under Article 6 in respect of such sales and the basis for calculating those royalties. With respect to sales of Drug Products and the SERM Oncology Product -42- 44 invoiced in United States Dollars ("Dollars"), the Net Sales amounts and the amounts due to Ligand hereunder shall be expressed in Dollars. With respect to sales of Drug Products and the SERM Oncology Product invoiced in a currency other than Dollars, the Net Sales shall be calculated using Lilly's then current standard exchange rate methodology for the translation of foreign currency sales into Dollars. Each quarterly report shall be accompanied by a list of the exchange rates used in calculating Net Sales covered by such quarterly report. Lilly will at Ligand's reasonable request but not more frequently than once a Calendar Quarter inform Ligand as to the specific exchange rate translation methodology, if any, used for a particular country or countries. In the event that any exchange rate translation methodology changes, Lilly will inform Ligand of the change in the quarterly report next due. Each quarterly report shall be due on the seventy-fifth (75th) day following the close of each reporting period. Lilly shall keep accurate records in sufficient detail to enable the amounts due hereunder to be determined and to be verified by the independent public accountants described hereunder. Lilly shall furnish annually to Ligand appropriate evidence of payment of any tax or other amount required by applicable laws or regulations to be deducted from any royalty payment, including any tax or withholding levied by a foreign taxing authority in respect of the payment or accrual of any royalty. (b) All payments shall be made in Dollars at the time of quarterly reporting. If at any time legal restrictions prevent the prompt remittance of any payments with respect to any country where Drug Products or the SERM Oncology Product are sold, Lilly or its sublicensees or marketing partners shall have the right and option to make such payments by depositing the amount thereof in local currency to Ligand's account in a bank or depository in such country. Upon the written request of Ligand, at Ligand's expense and not more than once in or in respect of any Calendar Year, *** *** *** *** Upon the expiration of thirty-six (36) months following the end of any Calendar Year, the calculation of amounts payable with respect to such fiscal year shall be binding and conclusive upon Ligand, and Lilly and its sublicensees and marketing partners shall be released from any liability or accountability with respect to payments for such year. The report prepared by such independent public accountant, a copy of which shall be sent or otherwise provided to Lilly by such independent public accountant at the same time it is sent or otherwise provided to Ligand, shall contain the conclusions of such independent public accountant regarding the audit and will specify that the amounts paid to Ligand pursuant thereto were correct or, if incorrect, the amount of any underpayment or overpayment. If such independent public accountant's report shows any underpayment, Lilly shall remit or shall cause its sublicensees or marketing partners to remit to Ligand within thirty (30) days after Lilly's receipt of such report, (i) the amount of -43- *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 45 such underpayment and (ii) if such underpayment exceeds ten percent (10%) of the total amount owed for the Calendar Year then being audited, the reasonable and necessary fees and expenses of such independent public accountant performing the audit, subject to reasonable substantiation thereof. Any overpayments shall be fully creditable against amounts payable in subsequent payment periods. Ligand agrees that all information delivered or subject to review under this Section 10.7 or under any sublicensee or marketing agreement is Confidential Information and that Ligand shall retain all such information in confidence. 10.8 STATUS REPORTS. At any time after the committees referred to in Article 2 cease to exist, Lilly shall, upon request, and not more frequently than semi-annually , provide to Ligand a written report summarizing the activities of Lilly with respect to the Drug Products and the SERM Oncology Product, and in the event that Ligand obtains rights to any Discontinued Drug Product, Ligand shall, upon request, and not more frequently than semi-annually, provide to Lilly a written report summarizing the activities of Ligand with respect to the Discontinued Drug Products, the contents of each such report to be as set forth on Schedule 10.8. ARTICLE 11 INTELLECTUAL PROPERTY 11.1 PATENTABLE INVENTIONS AND TECHNOLOGY. (a) OWNERSHIP. Ligand will disclose to Lilly all Ligand Technology and Joint Technology and Lilly will disclose to Ligand all Lilly Technology and Joint Technology to the extent developed or acquired during the Research Program and the Development Program promptly after the disclosing party recognizes the significance thereof unless the same shall have been developed as part of a collaboration with a Third Party, the terms of which prohibit disclosure to the other party. All Ligand Patents and Ligand Technology shall be owned by Ligand, all Lilly Patents and Lilly Technology shall be owned by Lilly and all Joint Patents and Joint Technology shall be owned jointly by Ligand and Lilly, inventorship to be determined in accordance with U.S. laws of inventorship, where applicable. (b) PATENT PROSECUTION. Ligand shall be responsible for preparing, filing, prosecuting, maintaining and taking such other actions as are reasonably necessary or appropriate with respect to the Ligand Patents and any patentable inventions encompassed by Ligand Technology. Lilly shall be responsible for preparing, filing, prosecuting, maintaining and taking such other actions as are reasonably necessary or appropriate with respect to the Joint Patents, Lilly Patents and any patentable inventions encompassed by Lilly Technology or Joint Technology. Each party will consult the other party with respect to its choice of external patent counsel and will keep that party continuously informed of all material developments relating to the preparation, filing, prosecution and maintenance of patents and patent applications covered by this Agreement. Each party shall endeavor in good faith to coordinate its efforts with those -44- 46 of the other party to minimize or avoid interference with the prosecution of the other party's patent applications. To the extent practicable, each party shall provide the Steering Committee with a copy of any patent application which first discloses any specific Lilly Technology, Ligand Technology or Joint Technology, prior to filing the first of such applications in any jurisdiction, for review and comment by the Steering Committee or its designees. (c) COSTS. Subject to the provisions of subsection (d) below, the party initially responsible for all costs incurred in the preparation, filing, prosecution and maintenance of a patent pursuant to Section 11.1(b) shall bear all costs incurred in the preparation, filing, prosecution and maintenance of such patents; provided, however, that Ligand shall pay one-half (1/2) of all reasonable external expenses incurred by Lilly while prosecuting and maintaining Joint Patents. External expenses will include patent office fees and taxes in connection with the filing, prosecution and maintenance of any patent or patent application and the fees of any outside patent attorneys or agents in connection with the ex parte preparation, filing, prosecution and maintenance thereof. The allocation of such expenses will occur on an annual basis at the end of each Calendar Year, at which time Lilly will provide Ligand with an itemized list of external expenses denominated in Dollars incurred during the previous annual period in prosecuting and maintaining Joint Patents and Ligand will reimburse Lilly's expenses within sixty (60) days of the date of receipt of this itemized list. (d) DISCONTINUANCE OF PATENT PROSECUTION. The party initially responsible for preparation, filing, prosecution and maintenance (including the costs or reimbursement of costs related thereto) of a particular Ligand Patent, Lilly Patent or Joint Patent (the "Initial Responsible Party") shall give thirty (30) days advance notice (the "Discontinuance Election") to the other party of any decision to cease preparation, filing, prosecution and maintenance of that patent (a "Discontinued Patent") provided, however, that abandonment of a patent application in favor of a continuation or continuation-in-part thereof shall not constitute discontinuance of the parent application. In such case, the other party may elect at its sole discretion to continue preparation, filing and prosecution or maintenance of the Discontinued Patent at its sole expense. The party so continuing shall own any such patent or patent application and patents maturing therefrom; and the Initial Responsible Party shall execute such documents and perform such acts as may be reasonably necessary for the other party to file or to continue prosecution or maintenance, including assigning ownership of such patents and applications to such electing party. Discontinuance may be on a country-by-country basis or for a patent application or patent series in total. In the event that Lilly exercises its Discontinuance Election with respect to a Discontinued Patent in a particular country, Lilly's license under Section 8.1 with respect to that Discontinued Patent shall terminate with respect to such country. 11.2 INFRINGEMENT CLAIMS BY THIRD PARTIES. (a) In the case of any claim of infringement of a patent owned by a Third Party based upon the making, having made, using, having used, importing, offering for sale, selling or having sold Compound 268 or Compound 324 in a Drug Product, and the patent Covers -45- 47 Compound 268 or Compound 324 per se, or the use of Compound 268 or Compound 324 per se in the treatment of diabetes mellitus, obesity, insulin resistance, dyslipidemia, and cardiovascular disorders associated with diabetes mellitus or insulin resistance, (i) Lilly shall have the right to obtain a license from the Third Party and credit *** of any royalty payable to the Third Party against the royalty payable to Ligand, but in no event will Ligand's royalty each year be reduced by more than *** , or (ii) if Lilly and/or Ligand is sued for infringement by such Third Party, Lilly shall control and defend or settle the action at its expense and shall pay any damages or other monetary awards resulting therefrom, and Lilly shall be entitled to credit *** of such monetary award against the royalties payable to Ligand, but in no event will Ligand's royalty each year be reduced by more than *** . (b) In the case of any claim of infringement of a patent owned by a Third Party based upon the making, having made, using, having used, importing, offering for sale, selling or having sold any Research Compound in a Drug Product other than Compound 268 or Compound 324, and the patent Covers the Research Compound per se, or the use of the Research Compound per se in the treatment of diabetes mellitus, obesity, insulin resistance, dyslipidemia, and cardiovascular disorders associated with diabetes mellitus or insulin resistance, (i) Lilly shall have the right to obtain a license from the Third Party and credit *** of any royalty payable to the Third Party against the royalty payable to Ligand, but in no event will Ligand's royalty each year be reduced by more than *** , or (ii) if Lilly and/or Ligand is sued for infringement by such Third Party, Lilly shall control and defend or settle the action at its expense and shall pay any damages or other monetary awards resulting therefrom, and Lilly shall be entitled to credit *** of such monetary award against the royalties payable to Ligand, but in no event will Ligand's royalty each year be reduced by more than *** *** . (c) If a claim of infringement is made against Lilly and/or Ligand by a Third Party and that claim is based upon a claim of infringement for use of an assay system or biological material used in an assay system (for example, the co-transfection assay or a gene or protein used therein) which is Ligand Technology and the claim of infringement is not based on a patent claim which covers a compound or its method of use or any other separately patented technology, then (i) Lilly shall have the right to obtain a license from the Third Party and credit *** of any royalty payable to the Third Party against the royalty payable to Ligand arising from the infringing use, but in no event will Ligand's royalty each year be reduced by more than *** , or (ii) if Lilly and/or Ligand is sued for infringement by such Third Party, Ligand shall control and defend or settle the action and Ligand and Lilly shall share equally all expenses of the action and any damages or other monetary award resulting therefrom. Lilly shall have the right to approve any settlement of any such action, which approval will not be unreasonably withheld. (d) If a claim of infringement is made against Lilly by a Third Party based upon a claim of patent infringement not arising under (a), (b) or (c) above, Lilly shall have the *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -46- 48 obligation to control and defend or settle the claim at its sole expense (including the payment of any damages, attorneys' fees or other monetary awards). 11.3 INFRINGEMENT CLAIMS AGAINST THIRD PARTIES. (a) Ligand and Lilly each agree to take commercially reasonable actions to protect their respective Patents and Technology from infringement and from unauthorized possession or use. (b) If any Ligand Patent, Ligand Technology, Lilly Patent, Lilly Technology, Joint Patent or Joint Technology is infringed or misappropriated, as the case may be, by a Third Party, the party to this Agreement first having knowledge of such infringement or misappropriation, or knowledge of a reasonable probability of such infringement or misappropriation, shall promptly notify the other in writing. The notice shall set forth the facts of such infringement or misappropriation in reasonable detail. Subject to the rights of Third Parties, the owner of the Patent or Technology shall have the primary right, but not the obligation, to institute, prosecute and control any action or proceeding with respect to infringement or misappropriation of such Patent or Technology by a Third Party seeking to develop or market a Modulator or Regulator using its own counsel and the other party shall have the right to be represented in such action by its own counsel. The Steering Committee shall determine, or, if the Steering Committee is no longer in existence, the parties shall mutually determine, which party shall have the primary responsibility to institute, prosecute, and control any action or proceeding with respect to infringement or misappropriation of Joint Patents or Joint Technology and the other party shall have the right to be represented by its counsel. The costs and expenses of all suits brought by the party having the primary right or responsibility to institute, prosecute, and control such action or prosecution (including the costs and expenses of the other party and its separate counsel, if any, should the other party elect to participate in such action or proceeding) shall be paid *** by Lilly and *** by Ligand and all damages or other monetary awards recovered therein remaining after the pro rata reimbursement of such costs and expenses shall be split (i) *** to Lilly and (ii) *** to Ligand. If the party having the primary right or responsibility to institute, prosecute, and control such action or prosecution fails to do so within a period of one hundred twenty (120) days after receiving notice of the infringement, the other party, subject to the prior rights of any Third Party, shall have the right to bring and control any such action by counsel of its own choice, and the other shall not have the right to participate in such action or proceeding, except that such party may be joined as a party plaintiff and, in case of joining, such party agrees to give the other party reasonable assistance and authority to file and to prosecute such suit. All costs and expenses of any suit brought by the party not having the primary right or responsibility to institute, prosecute and control such action or prosecution (including the costs and expenses incurred by the other party in providing reasonable assistance to the party initiating the action or proceeding) shall be paid, and all damages or other monetary awards recovered therein shall be retained, by the party initiating the action or proceeding. No settlement or consent judgment or other voluntary final disposition of *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -47- 49 a suit under this Section 11.3 may be entered into without the joint consent of Ligand and Lilly (which consent shall not be unreasonably withheld). 11.4 NOTICE OF CERTIFICATION. Ligand and Lilly each shall immediately give notice to the other of any certification filed under the U.S. "Drug Price Competition and Patent Term Restoration Act of 1984" claiming that a Joint Patent, a Ligand Patent or a Lilly Patent is invalid or that any infringement will not arise from the manufacture, use, import, offer for sale, or sale of any product by a Third Party. If Ligand decides not to bring infringement proceedings against the entity making such a certification with respect to a Ligand Patent, Ligand shall give notice to Lilly of its decision not to bring suit within twenty-one (21) days after receipt of notice of such certification. Lilly may then, but is not required to, bring suit against the party that filed the certification. If Lilly decides not to bring infringement proceedings against the entity making such a certification with respect to a Joint Patent, or a Lilly Patent, Lilly shall give notice to Ligand of its decision not to bring suit within twenty-one (21) days after receipt of notice of such certification. Ligand may then, but is not required to, bring suit against the party that filed the certification. Any suit by Lilly or Ligand shall either be in the name of Lilly or in the name of Ligand, or jointly by Lilly and Ligand, as may be required by law. For this purpose, the party not bringing suit shall execute such legal papers necessary for the prosecution of such suit as may be reasonably requested by the party bringing suit. 11.5 PATENT TERM EXTENSIONS. The parties shall cooperate with each other in gaining patent term extensions wherever applicable to patents Covering Drug Products and products to which Ligand acquires rights under this Agreement or that also cover products for which Ligand has rights to market outside the Field. The party first eligible to seek extension of such patent shall have the right to do so; provided, that if in any country the first party has an option to extend the patent term for only one of several products, the first party will consult with the other party before making the election. If more than one patent is eligible for extension, the Steering Committee shall agree upon a strategy that will maximize patent protection for Drug Products and for products to which Ligand acquires rights under this Agreement and products which Ligand has rights to market outside the Field. All filings for such extensions and certificates shall be made by the party to whom the patent is assigned, provided, however, that in the event that the party to whom the patent is assigned elects not to file for an extension or supplementary protection certificate, such party shall (i) inform the other party of its intention not to file and (ii) grant the other party the right to file for such extension or certificate. ARTICLE 12 CONFIDENTIALITY AND NONDISCLOSURE 12.1 CONFIDENTIALITY. Unless otherwise set forth in this Agreement, for a period from the Effective Date until five (5) years following the later of: (a) the termination of this Agreement or (b) if Lilly or one or more of its Affiliates is marketing a Drug Product, the date on which -48- 50 Lilly and its Affiliates cease to market any Drug Product, each party and its respective Affiliates shall maintain in confidence all Confidential Information, and shall not, except as contemplated by this Agreement, disclose Confidential Information or use Confidential Information for its benefit or the benefit of others, without the consent of the disclosing party (the "Disclosing Party"). Documents made available to the receiving party (the "Receiving Party") shall remain the property of the Disclosing Party and shall be returned upon written request of the Disclosing Party, except that one copy of all such information may be retained for legal archival purposes by the Receiving Party. 12.2 AUTHORIZED DISCLOSURE. Each party may disclose Confidential Information for the purpose of making various regulatory filings and complying with applicable governmental regulations, and to sublicensees (potential and actual), marketing partners (potential and actual), consultants and others having a need to know for the purposes of development, manufacture or marketing of Drug Products pursuant to this Agreement, provided that such sublicensees, marketing partners, consultants and others shall also agree to appropriate and comparable confidentiality and non-use provisions. In addition, each party shall be entitled to disclose Confidential Information to the extent required by applicable law, orders of courts, regulatory authorities or similar bodies having jurisdiction over the party ("Legal Process"). The Receiving Party shall promptly notify the Disclosing Party of any request or demand by Legal Process for disclosure of Confidential Information. With respect to any disclosure of Confidential Information, including the text of this Agreement, for the purpose of complying with applicable government regulations, the disclosing party shall give the other party an opportunity to review and comment upon the extent of any such disclosure of Confidential Information prior to disclosure. 12.3 NONDISCLOSURE OF AGREEMENT. Neither party shall disclose any information about this Agreement without the prior written consent of the other. Consent shall not be required, however, for (a) disclosures to tax or other governmental authorities or to potential or actual sublicensees, or marketing partners to the extent required or contemplated by this Agreement, provided, that in connection with such disclosure, each party agrees to use its commercially reasonable efforts to secure confidential treatment of such information, (b) disclosures of information for which consent has previously been obtained or (c) information which had previously been publicly disclosed. Each party shall have the further right to disclose the terms of this Agreement as required by applicable law, including the rules and regulations promulgated by the Securities and Exchange Commission, and to disclose such information to shareholders or potential investors as is customary for publicly-held companies. Any copy of this Agreement to be filed with the Securities and Exchange Commission shall be redacted to the satisfaction of both parties; provided, in the event that the Securities and Exchange Commission objects to the redaction of any portion of the Agreement after the initial submission, the filing party shall inform the other party of the objections and shall in good faith respond to the objections in an effort to limit the disclosure required by the Securities and Exchange Agreement, but in any event the filing party shall be free to include any portions of the Agreement it deems necessary to respond to the objections in any future filings. Without limiting the generality of the foregoing -49- 51 and except in the circumstance where a party's outside counsel advises the party that immediate disclosure is required, in the event that a Receiving Party, intends to disclose Confidential Information as permitted under this Article 12, such a party will provide to the Disclosing Party a copy of the information to be disclosed and an opportunity to comment thereon prior to such disclosure, and, to the extent practicable, consult with the Disclosing Party on the necessity for the disclosure and the text of the proposed release within a reasonable time in advance of the proposed disclosure. Without limiting the generality of this Section 12.3, Ligand may allow Allergan to review a copy of this Agreement, for the sole purpose of complying with Ligand's obligation to Allergan under the ALRT Agreement. Any copy of this Agreement disclosed under this Article 12 shall be redacted to the satisfaction of both parties. 12.4 SURVIVAL. The confidentiality obligations of this Article 12 shall survive the termination or expiration of the Agreement. 12.5 PRESS RELEASES. Press releases or other public communication by either party relating to the collaboration contemplated by this Agreement shall be approved in advance by the other party, except for those communications required by law, disclosures of information for which consent has previously been obtained or information which has been previously disclosed, or as otherwise set forth in this Agreement. ARTICLE 13 TERM AND TERMINATION OF AGREEMENT 13.1 TERM. This Agreement shall become effective on the Effective Date and shall continue in effect, unless terminated earlier as described hereunder or by mutual written agreement of the parties, until the later of either: (1) the expiration of the last to expire Lilly Patent, Ligand Patent or Joint Patent Covering a Drug Product or a Discontinued Drug Product, New Compound, Ligand Option Compound; (2) in the event that Lilly or any Lilly Affiliate is developing or marketing a Research Compound or Drug Product in accordance with the terms of this Agreement but there is no issued Lilly Patent, Ligand Patent or Joint Patent Covering a Drug Product, then *** from the date of the most recent First Commercial Sale with respect to a Drug Product, if any, or (3) the expiration of the last applicable Data Exclusivity Period with respect to a Drug Product. 13.2 TERMINATION FOR MATERIAL BREACH. Either party shall have the right to terminate this Agreement after ninety (90) days written notice to the other in the event the other is in material breach of this Agreement, unless the other party cures the breach before the expiration of such period of time. Such notice shall set forth in reasonable detail the specifics of the breach. In the event of termination under this Section 13.2 by Lilly, all licenses granted under this Agreement to Lilly and its Affiliates shall not be affected and shall continue in full force and effect, and Lilly and its Affiliates shall have the right to exercise all such licenses (subject to all -50- *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 52 payment and other surviving obligations as set forth in Section 13.4). All licenses granted under this Agreement to Ligand and its Affiliates shall automatically terminate upon such termination by Lilly. In the event of termination under this Section 13.2 by Ligand, all licenses granted under this Agreement to Ligand and its Affiliates shall not be affected and shall continue in full force and effect, and Ligand and its Affiliates shall have the right to exercise all such licenses (subject to all payment and other surviving obligations as set forth in Section 13.4). All licenses granted under this Agreement to Lilly and its Affiliates shall automatically terminate upon such termination by Ligand. Notwithstanding the foregoing, Lilly shall be permitted to distribute and sell all supplies of Drug Products in its inventory at the time of termination until such supplies are exhausted. 13.3 TERMINATION UPON INSOLVENCY. This Agreement may be terminated by either party upon notice to the other should the other party: (a) consent to the appointment of a receiver or a general assignment for the benefit of creditors, or (b) file or consent to the filing of a petition under any bankruptcy or insolvency law or have any such petition filed against it which has not been stayed within 60 days of such filing. 13.4 ACCRUED RIGHTS, SURVIVING OBLIGATIONS, RESIDUAL RIGHTS. Upon the expiration or early termination of this Agreement, except as provided herein to the contrary, all rights and obligations of the parties shall cease, except as follows: (a) obligations to pay royalties and other sums accruing hereunder up to the date of termination; (b) the right to complete the manufacture and sale of Drug Products, Discontinued Drug Products and Ligand Option Compounds, which qualify as "work in process" under GAAP or which are in stock at the date of termination, and the obligation to pay royalties on Net Sales of such Drug Products, the SERM Oncology Product, Discontinued Drug Products and Ligand Option Compounds; (c) the obligations to pay milestones and royalties with respect to Drug Products, the SERM Oncology Product, Discontinued Drug Products and Ligand Option Compounds; (d) all provisions regarding confidentiality shall continue in full force and effect; (e) obligations for record-keeping and accounting reports for so long as Drug Products, the SERM Oncology Product, Discontinued Drug Products and Ligand Option -51- 53 Compounds are sold, plus three (3) years. At such time after termination of this Agreement when sales or other dispositions of Drug Products, the SERM Oncology Product, Discontinued Drug Products and Ligand Option Compounds have ceased, Lilly or Ligand, as the case may be, shall render a final report along with any royalty payment due; (f) the parties rights to inspect books and records as described in Article 10; (g) the obligations of defense and indemnity as described in Article 14; (h) any cause of action or claim of a party accrued or to accrue because of any breach or default by the other party hereunder (subject to applicable statutes of limitations); and (i) in the event of expiration of this Agreement under Section 13.1, Lilly shall have a fully paid-up, perpetual license to the rights granted pursuant to Section 8.1 solely with respect to the unpatented Ligand Technology, and Ligand shall have a fully paid-up, perpetual license to the rights granted pursuant to Section 8.2 solely with respect to the unpatented Lilly Technology; and (j) all other terms, provisions, representations, rights and obligations contained in this Agreement that by their sense and content are intended to survive. ARTICLE 14 INDEMNITY 14.1 CLAIMS. Each party hereby agrees to indemnify, defend and hold harmless the other party and its Affiliates, and their respective officers, directors, agents and employees from and against any and all suits, claims, actions, demands, liabilities, expenses and/or losses, including reasonable attorneys' fees and other costs of defense other than claims for patent infringement (which shall be resolved pursuant to Article 11) ("Claims"), (a) resulting directly or indirectly from the manufacture, use, handling, storage, sale or other disposition of Research Compounds, New Compounds, Drug Products, the SERM Oncology Product, Discontinued Drug Products or Ligand Option Compounds by the indemnifying party, its Affiliates, agents or Sublicensees (other than a party hereunder), but only to the extent such Claims do not result from the negligence or intentional misconduct of the party seeking indemnification, or (b) resulting directly from a breach of any representation or warranty of the indemnifying party contained in Article 15 of this Agreement. 14.2 DEFENSE. Any entity entitled to indemnification under this Article 14 shall give prompt written notice to the indemnifying party of any Claims with respect to which it seeks indemnification, and the indemnifying party shall have the option to assume the defense of such Claims with counsel reasonably satisfactory to the indemnified party. If such defense is assumed -52- 54 by the indemnifying party with counsel so selected, the indemnifying party will not be obligated to pay the fees and expenses of any separate counsel retained by the indemnified party with respect to such Claims. Except with the prior written consent of the indemnified party, which consent shall not be unreasonably withheld, the indemnifying party may not enter into any settlement of such litigation unless such settlement includes an unqualified release of the indemnified party. 14.3 INSURANCE. Ligand and Lilly shall each have and maintain such type and amounts of liability insurance covering the manufacture, supply, use, and sale of Research Compounds and Drug Products as is normal and customary in the pharmaceutical industry generally for parties similarly situated, and will upon request provide the other party with a copy of its policies of insurance in that regard, along with any amendments and revisions thereto. ARTICLE 15 REPRESENTATIONS AND WARRANTIES 15.1 MUTUAL REPRESENTATIONS AND WARRANTIES. Each party hereby represents and warrants to the other party as of the Effective Date as follows: (a) CORPORATE EXISTENCE AND POWER. Such party (i) is a corporation duly organized, validly existing and in good standing under the laws of the state in which it is incorporated, and (ii) has full corporate power and authority and the legal right to own and operate its property and assets and to carry on its business as it is now being conducted and is contemplated in this Agreement. (b) AUTHORIZATION. Such party (i) has the corporate power and authority and the legal right to enter into the Agreement and perform its obligations hereunder, and (ii) has taken all necessary corporate action on its part required to authorize the execution and delivery of the Agreement and the performance of its obligations hereunder. The Agreement has been duly executed and delivered on behalf of such party, and constitutes a legal, valid, binding obligation of such party and is enforceable against it in accordance with its terms subject to the effects of bankruptcy, insolvency or other laws of general application affecting the enforcement of creditor rights and judicial principles affecting the availability of specific performance and general principles of equity whether enforceability is considered a proceeding at law or equity. (c) ABSENCE OF LITIGATION. Such party is not aware of any pending or threatened litigation (and has not received any communication) which alleges that such party's activities related to this Agreement have violated, or that by conducting the activities as contemplated herein such party would violate, any of the intellectual property rights of any other person. -53- 55 (d) CONSENTS. All necessary consents, approvals and authorizations of all governmental authorities and other persons or entities required to be obtained by such party in connection with the Agreement have been obtained. (e) NO CONFLICT. The execution and delivery of the Agreement and the performance of such party's obligations hereunder (i) do not conflict with or violate any requirement of applicable law or regulation or any provision of articles of incorporation or bylaws of such party in any material way, and (ii) do not conflict with, violate or breach or constitute a default or require any consent under, any contractual obligation or court or administrative order by which such party is bound. (f) PATENTS. Except as such party has otherwise advised the other party in writing, such party represents and warrants to the other that, to the best of its knowledge, it has sufficient legal and/or beneficial title and ownership under its intellectual property rights necessary for it to fulfill its obligations under this Agreement and that it is not aware of any communication alleging that it has violated or by conducting its business as contemplated by this Agreement would violate any of the intellectual property rights of any other person. As used herein, "intellectual property rights" means all patent rights, copyrights, trademarks, trade secret rights, chemical and biological material rights and know-how rights necessary or useful to make, use, import, offer for sale or sell Research Compounds and/or Drug Products. (g) PRIOR DATA. Ligand represents and warrants to Lilly that it has made (or will make) available to Lilly (to the extent the same exists and is material to assessing the commercial, medical, clinical or regulatory potential of Research Compounds) all toxicology studies, clinical data, manufacturing process data and other information in its possession regarding Research Compounds that is material and would be reportable to the FDA under 21 C.F.R. 200 et. seq., and that to the best of its knowledge, such data and information is accurate and complete and is what it purports to be. Lilly represents and warrants to Ligand that it will make available to Ligand (to the extent the same exists and is material to assessing the commercial, medical, clinical or regulatory potential of Discontinued Drug Products) all toxicology studies, clinical data, manufacturing process data and other information in its possession regarding Discontinued Drug Products that is material and would be reportable to the FDA under 21 C.F.R. 200 et. seq., and that to the best of its knowledge, such data and information will be accurate and complete and what it purports to be. (h) NO DEBARMENT. Such party will comply at all times with the provisions of the Generic Drug Enforcement Act of 1992 and will upon request certify in writing to the other that none of it, its employees, or any person providing services to such party in connection with the collaboration contemplated by this Agreement have been debarred under the provisions of such Act. 15.2 ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS. Ligand and ALRT hereby represent, warrant and covenant to Lilly as follows: -54- 56 *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** (c) Ligand hereby agrees to use its commercially reasonable efforts to comply with the terms and conditions of those certain license agreements set forth in Schedule 15.2. In addition, Ligand hereby agrees to timely pay all royalty and milestone payments required to be paid under those certain license agreements set forth in Schedule 15.2 during the Research Program Term and thereafter only as necessary to grant Lilly the licenses granted pursuant to Section 8.1(a). Ligand has provided to Lilly complete and correct copies of such license agreements prior to the Effective Date. Each such license agreement is in full force and effect and, to Ligand's knowledge, no event has occurred which with notice or the passage of time would constitute a breach or event of default under, or permit termination of, such license agreement. To Ligand's knowledge, there is no material unauthorized use, infringement or misappropriation of the Ligand Patents Covering Compound 268 or Compound 324. There are no administrative, judicial or other proceedings pending, or to the knowledge of Ligand, threatened, in which a person or government body is or would be contesting directly the ownership of, or any rights of Ligand or any licensee under, any Ligand Patent or Ligand Technology. -55- *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 57 ARTICLE 16 MISCELLANEOUS PROVISIONS 16.1 GOVERNING LAW. The Agreement shall be governed by the laws of the State of Indiana, without regard to Indiana choice of law provisions. 16.2 DISPUTE RESOLUTION PROCESS. In the event of any dispute relating to this Agreement or the collaborative effort contemplated hereby, the parties shall, prior to instituting any lawsuit, arbitration or other dispute resolution process on account of such dispute, follow the procedures for dispute resolution set forth in Section 2.5 of this Agreement if such dispute relates to the conduct of or decisions made as part of the Research Program or the Development Program. In the event of any dispute relating to or arising from this Agreement which a party does not believe is covered by Section 2.5 and prior to instituting any litigation with respect thereto, the dispute shall be presented to David Robinson or his successor as Chief Executive Officer of Ligand on behalf of Ligand, and August M. Watanabe or his successor as chief scientific officer of Lilly on behalf of Lilly; provided, however, that this provision shall not prevent either party from seeking a preliminary injunction or other equitable relief in the event such party believes it will suffer irreparable harm. These executives shall confer and consider each party's view and shall attempt in good faith to resolve the dispute between themselves or, if they are unable to so resolve the dispute, to establish a mechanism to resolve the dispute promptly and efficiently. In the event said executives are unable to resolve such dispute or agree upon a mechanism to resolve such dispute within thirty (30) days, either party shall be entitled to institute litigation and seek such remedies as may be available. 16.3 NOTICES. All notices required or permitted to be given under this Agreement shall be in writing and shall be deemed given, upon receipt, if mailed by registered or certified mail (return receipt requested), postage prepaid, or sent by overnight delivery (receipt verified) to the address below, or given personally or transmitted by facsimile to the number indicated below (with confirmation). To Lilly: Eli Lilly and Company Lilly Corporate Center Indianapolis, IN 46285 Attention: General Counsel Fax: (317) 276-9152 -56- 58 To Ligand: Ligand Pharmaceuticals Incorporated 9393 Towne Centre Drive San Diego, CA 92121 Attention: General Counsel Fax: (619) 625-4521 Any party may, by written notice to the others, designate a new address or fax number to which notices to the party giving the notice shall thereafter be mailed or faxed. 16.4 FORCE MAJEURE. If either party's performance hereunder is affected by any extraordinary, unexpected and unavoidable event such as acts of God, floods, fires, riots, war, accidents, labor disturbances, breakdown of plant or equipment, lack or failure of transportation facilities, unavailability of equipment, sources of supply or labor, raw materials, power or supplies, infectious diseases of animals, or by the reason of any law, order, proclamation, regulation, ordinance, demand or requirement of the relevant government or any sub-division, authority or representative thereof, or by reason of any other cause whatsoever (provided that in all such cases the party claiming relief on account of such event can demonstrate that such event was extraordinary, unexpected and unavoidable by the exercise of reasonable care) ("Force Majeure") it shall as soon as reasonably practicable notify the other party of the nature and extent thereof and take all reasonable steps to overcome the Force Majeure and to minimize the loss occasioned to that other party. Neither party shall be deemed to lose any rights under, be in breach of this Agreement or otherwise be liable to the other party by reason of any delay in performance or nonperformance of any of its obligations hereunder, except with respect to payment obligations, to the extent that such delay and nonperformance is due to any Force Majeure of which it has notified the other party and the time for performance of that obligation shall be extended accordingly. 16.5 WITHHOLDING TAXES. If either party is required by the United States government or other authorities to withhold any tax on the amounts payable by that party to the other party under this Agreement, that party shall be allowed to do so, and shall in such case remit payments to the other party net of such withheld amount, provided that the withholding party furnishes the other party with reasonable evidence of such withholding payment in electronic or written form as soon as practicable after such withholding in order that the other party may use the withholding tax paid as a tax credit. 16.6 ENTIRE AGREEMENT. This Agreement, its exhibits and schedules, the Confidentiality Agreements between Ligand and Lilly dated September 30, 1996, January 23, 1997 and May 8, 1997, the Targretin Agreement, the Option Agreement and the Stock Purchase Agreement between Ligand and Lilly of even date herewith set forth the entire agreement and understanding of the parties relating to the subject matter contained herein and merges all prior discussions and agreements between them. No party shall be bound by any representation other than as expressly -57- 59 stated in this Agreement, or by a written amendment to this Agreement signed by authorized representatives of both parties. 16.7 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. 16.8 DISCLAIMER OF AGENCY. This Agreement shall not constitute any party the legal representative or agent of another, nor shall any 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. 16.9 SEVERABILITY. If any term, covenant or condition of this Agreement or the application thereof to any party or circumstance shall, to any extent, be held to be invalid or unenforceable, then (i) the remainder of this Agreement, or the application of such term, covenant or condition to parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Agreement shall be valid and be enforced to the fullest extent permitted by law; and (ii) the parties hereto covenant and agree to renegotiate any such term, covenant or application thereof in good faith in order to provide a reasonably acceptable alternative to the term, covenant or condition of this Agreement or the application thereof that is invalid or unenforceable, it being the intent of the parties that the basic purposes of this Agreement are to be effectuated. 16.10 ASSIGNMENT. Lilly may discharge any obligations and exercise any right hereunder through an Affiliate although Lilly shall remain ultimately responsible for the proper discharge of all obligations hereunder notwithstanding any assignment or delegation to any such Affiliate. References to Lilly shall include any Affiliate of Lilly to whom such an assignment or delegation has been made in accordance with this Agreement. Except as provided in this Section 16.10 or otherwise expressly provided in this Agreement, neither Lilly nor Ligand shall delegate duties of performance or assign, in whole or in part, rights or obligations under this Agreement without the prior written consent of the other party, not to be unreasonably withheld, and any attempted delegation or assignment without such written consent shall be of no force or effect. Notwithstanding the foregoing, Ligand or Lilly may assign the Agreement and its rights and obligations hereunder in connection with the transfer or sale of all or substantially all of its business, or in the event of its merger or consolidation or change in control or similar transaction. This Agreement shall be binding upon the permitted successors and assigns of the parties. 16.11 HEADINGS. The headings contained in this Agreement have been added for convenience only and shall not be construed as limiting or defining the content of said sections or paragraphs. 16.12 LIMITATION OF LIABILITY. No party shall be liable to another for indirect, incidental, consequential or special damages, including but not limited to lost profits, arising from or relating to any breach of this Agreement, regardless of any notice of the possibility of such damages. Nothing in this Section is intended to limit or restrict the indemnification rights or obligations of any party. -58- 60 16.13 INTERPRETATION. This Agreement has been jointly prepared by the parties and their respective legal counsel and ambiguities shall not be strictly construed against either party. 16.14 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. 16.15 COMPLIANCE WITH LAWS. Each party shall, and shall cause its respective Affiliates to, comply in all material respects with all federal, state, local and foreign laws, statutes, rules and regulations applicable to the parties and their respective activities under this Agreement. 16.16 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 to carry out the purposes and intent of this Agreement. [Remainder of this page intentionally left blank] -59- 61 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above. ELI LILLY AND COMPANY By: /s/ August M. Watanabe ----------------------------------------- August M. Watanabe Executive Vice President LIGAND PHARMACEUTICALS INCORPORATED By: /s/ David E. Robinson ----------------------------------------- David E. Robinson President and Chief Executive Officer ALLERGAN LIGAND RETINOID THERAPEUTICS, INC. By: /s/ David E. Robinson ----------------------------------------- David E. Robinson President 62 SCHEDULE 1.12 COMPOUND 268 *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 63 SCHEDULE 1.13 COMPOUND 324 *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 64 Schedule 1.47 Intracellular Receptors *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 65 SCHEDULE 2.1 TECHNICAL OPERATING PLAN *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 66 SCHEDULE 10.8 *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 67 *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 68 Schedule 15.2 5. The Settlement Agreement, License and Mutual General Release between La Jolla Cancer Research Foundation, SelectRA Pharmaceutical Inc., Allergan Ligand, and Allergan Ligand Retinoid Therapeutics, Inc., effective August 23, 1995. 6. The Amended and Restated Technology Cross License Agreement among Allergan, Inc., Ligand Pharmaceuticals Inc. and Allergan Ligand Retinoid Therapeutics, Inc., effective September 24, 1997. 7. The license agreement between Salk Institute for Biological Studies and Ligand Pharmaceuticals Inc., effective October 20, 1988, and as amended on September 15, 1989, December 1, 1989 and October 20, 1990. 8. The agreements between Insitut Pasteur de Lille and Ligand Pharmaceuticals Inc., effective March 1, 1995 and December 1, 1995. 9. The agreement between Rockefeller and Ligand Pharmaceuticals Inc., effective November 14, 1991. 10. The agreement between Baylor College of Medicine and Ligand Pharmaceuticals Inc., effective March 9, 1992 and September 1, 1992. EX-10.169 6 EXHIBIT 10.169 1 EXHIBIT 10.169 OPTION AND WHOLESALE PURCHASE AGREEMENT THIS OPTION AND WHOLESALE PURCHASE AGREEMENT (the "Agreement") is entered into as of November 25, 1997 (the "Effective Date") at Indianapolis, Indiana, between ELI LILLY AND COMPANY ("Lilly") and LIGAND PHARMACEUTICALS INCORPORATED ("Ligand"). Whereas, *** *** *** *** *** *** Whereas, Lilly desires to grant to Ligand an option pursuant to which, if and when *** receives appropriate governmental approvals for marketing for the treatment *** in humans, Lilly will, subject to the terms and conditions of this Agreement *** *** , utilize Ligand as Lilly's exclusive (even as to Lilly) wholesaler of Lilly products consisting of, or containing as the active ingredient, *** (the "Products"), to be sold under the *** name for the treatment of *** in the territory defined below; and Whereas, *** *** Now, therefore, in consideration of the foregoing, the mutual covenants set forth below and other consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. LIGAND OPTION TO BECOME EXCLUSIVE WHOLESALER. 1.1 LIGAND OPTION. For a period equal to the earlier of (a) ninety (90) days after the Effective Date of this Agreement, (b) until February 27, 1998, or (c) until the date which is three (3) business days after the date on which Ligand delivers to Lilly the notice referred to in Section 1.4, (the "Ligand Option Period"), Ligand shall have the option (the "Ligand Option") to become Lilly's exclusive wholesaler of the Products subject to the terms and conditions contained in this Agreement. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 2 1.2 MANNER OF EXERCISE. To exercise the Ligand Option, Ligand shall deliver written notice of exercise to Lilly prior to the end of the Ligand Option Period in the manner set forth in Section 5.9 of this Agreement. 1.3 EFFECT OF LAPSE OF LIGAND OPTION. In the event Ligand does not exercise the Ligand Option prior to the end of the Ligand Option Period, or, in the event Ligand delivers written notice to Lilly prior to the end of the Ligand Option Period informing Lilly of its decision not to exercise the Ligand Option (the "Rejection Notice"), this Agreement shall automatically terminate and the parties only surviving rights and obligations under this Agreement shall be as follows: (a) Subject to the terms and conditions set forth in the stock purchase agreement described in Section 4.6, Lilly shall purchase from Ligand, and Ligand shall sell and issue to Lilly, for Twenty Million Dollars ($20,000,000), the number of shares of Ligand's voting common stock (the "Shares") equal to Twenty Million Dollars ($20,000,000) divided by one hundred twenty percent (120%) of the average daily closing price for the Shares as reported by the National Association of Securities Dealers, Inc. on the twenty (20) consecutive trading days immediately preceding the date which is five (5) days prior to the earlier of (A) the date of the Rejection Notice or (B) the last day of the Ligand Option Period; and (b) Ligand shall have the right to designate either Targretin (as defined in that certain Development and License Agreement (Targretin) dated the date of this Agreement), Compound 268 or Compound 324 (each as defined in that certain Collaboration Agreement dated the date of this Agreement) for increased royalties, which right shall be exercised in the manner set forth and on the terms and conditions provided in Section 5.1(b) of the Targretin Agreement with respect to Targretin, or Section 6.1(b) of the Collaboration Agreement with respect to Compound 268 or Compound 324. 1.4 *** *** *** *** *** *** *** *** 2. CERTAIN COVENANTS OF LIGAND. 2.1 PROMOTION AND INVENTORIES. (a) Ligand agrees to promote, sell and book sales of, the Products in the Territory (as defined below) as the exclusive (even as to Lilly) wholesaler of the Products *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -2- 3 *** *** in the Territory; and to purchase from Lilly Ligand's entire requirements for the Products. *** *** *** *** The United States, Canada, and, upon Ligand's appointment as exclusive wholesaler of the Products in the European Union, as provided for in Section 3, the European Union and the European Union Countries *** are referred to collectively in this Agreement as the "Territory." (b) To the extent that Ligand shall, with the prior approval of both Ligand and Lilly given or withheld in their respective sole discretion, undertake the physical distribution of the Products, Ligand agrees to provide full distribution efforts for the Products; to maintain the Products under proper conditions, both in storage and in transit to its customers, *** *** ; and to supply only Products that are not out-of-date, damaged, or shopworn; provided, however, unless and until the parties agree otherwise, Lilly shall provide the distribution services specified in Section 3.1(c). If Ligand does undertake physical distribution, Ligand shall provide to Lilly quarterly upon Lilly's request a listing of Ligand's complete and current inventory of Products by item and package size certified to be accurate by Ligand. 2.2 SALES EFFORT. Ligand agrees to use commercially reasonable selling efforts to, and otherwise promote, the Products, and not to: (a) Refuse or fail to supply promptly the Products when specified; (b) Fail to include in its system for determining its prices to its customers any provisions necessary to comply with the other provisions of this Agreement or enter into any agreement which would preclude Ligand from offering for sale a Product at any price acceptable to Ligand; or (c) Sell any Products to any party Ligand has reason to believe plans to use the Products or sell the Products for use outside the Territory. Ligand agrees that it shall hire and maintain a sales force appropriate for marketing of the Products in the Territory, develop and implement appropriate marketing plans, develop and utilize sales literature and other promotional aids, hold symposia for key physicians, and otherwise perform the duties associated with a promoter of the Products in the Territory. 2.3 SALES REPORTS. (a) Ligand shall have the right, but not the obligation, to report information regarding its sales of Products to one or more third parties organized to collect and report sales data to its subscribers. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -3- 4 (b) During the term of this Agreement and after first commercial sale of a Product, in the Territory, Ligand shall furnish or cause to be furnished to Lilly on a quarterly basis a written report or reports covering each calendar quarter (each such calendar quarter being sometimes referred to herein as a "reporting period") showing (i) the Net Sales (as defined in Schedule 3.1(a) to this Agreement) of the Product in each country during the reporting period by Ligand, its affiliates, sublicensees and assigns, and (ii) the royalties which shall have accrued under this Agreement in respect of such sales and the basis for calculating those royalties. With respect to sales of the Products invoiced in United States Dollars ("Dollars"), the Net Sales amounts and the amounts due to Lilly hereunder shall be expressed in Dollars calculated by using Ligand's then-current standard procedures and methodology. With respect to sales of the Products invoiced in a currency other than Dollars, the Net Sales shall be calculated using Ligand's then current standard exchange rate methodology for the translation of foreign currency sales into Dollars. Each quarterly report shall be accompanied by a listing of the exchange rates used in calculating Net Sales for such quarterly report. Ligand will at Lilly's reasonable request but not more frequently than once a calendar quarter inform Lilly as to the specific exchange rate translation methodology, if any, used for a particular country or countries. In the event that any exchange rate translation methodology changes, Ligand will inform Lilly of the change in the quarterly report next due. Each quarterly report shall be due on the seventy-fifth (75th) day following the close of each reporting period. Ligand shall keep accurate records in sufficient detail to enable the amounts due hereunder to be determined and to be verified by the independent public accountants described hereunder. Ligand shall furnish annually to Lilly appropriate evidence of payment of any tax or other amount required by applicable laws or regulations to be deducted from any royalty payment, including any tax or withholding levied by a foreign taxing authority in respect of the payment or accrual of any royalty. (c) All payments shall be made in Dollars at the time of quarterly reporting. If at any time legal restrictions prevent the prompt remittance of any payments with respect to any country where the Products are sold, Ligand, its affiliates, assigns and sublicensees or marketing partners shall have the right and option to make such payments by depositing the amount thereof in local currency to Lilly's account in a bank or depository in such country. (d) Upon the written request of Lilly, at Lilly's expense and not more than once in or in respect of any calendar year, independent public accountants designated by Lilly and reasonably acceptable to Ligand shall verify the accuracy of the sales reports furnished by Ligand in respect of any calendar year ending not more than thirty-six (36) months prior to the date of such notice. Upon the expiration of thirty-six (36) months following the end of any calendar year, the calculation of amounts payable with respect to such fiscal year shall be binding and conclusive upon Lilly, and Ligand, its Affiliates, and its sublicensees and -4- 5 marketing partners shall be released from any liability or accountability with respect to payments for such year. The report prepared by the independent public accountant, a copy of which shall be sent or otherwise provided to Ligand by such independent public accountant at the same time it is sent or otherwise provided to Lilly, shall contain the conclusions of such independent public accountant regarding the audit and will specify that the amounts paid to Lilly pursuant thereto were correct or, if incorrect, the amount of any underpayment or overpayment. If such independent public accountant's report shows any underpayment, Ligand shall remit or shall cause its sublicensees or marketing partners to remit to Ligand within thirty (30) days after Ligand's receipt of such report, (i) the amount of such underpayment and (ii) if such underpayment exceeds *** of the total amount owed for the calendar year then being audited, the reasonable and necessary fees and expenses of such independent public accountant performing the audit, subject to reasonable substantiation thereof. Any overpayments shall be fully creditable against amounts payable in subsequent payment periods. Lilly agrees that all information delivered or subject to review under this Section 2.3 or under any sublicensee or marketing agreement is Confidential Information (as defined in Section 5.14) and that Lilly shall retain all such information in confidence. 2.4 PAYMENT FOR PRODUCTS. Ligand agrees to pay in full within thirty (30) days *** *** each invoice delivered by Lilly to Ligand for the Products sold under this Agreement in accordance with the applicable provisions of this Agreement; and to pay interest on all overdue amounts owing from Ligand to Lilly hereunder outstanding for more than 30 days ("overdue") at the Prime Rate as published in The Wall Street Journal in effect from time to time plus *** per annum (or the highest amount allowed by law, if such lawful amount is lower than the foregoing) from the date the amounts become overdue. Ligand shall bear all credit risk in the Territory relating to collections from customers and third parties. 2.5 CONTROLLED SUBSTANCE DETERMINATION. In the event that any of the Products are determined to be controlled substances or subject to any regulatory requirements not provided for in this Agreement, the parties will agree on reporting and other responsibilities sufficient to allow each of them to fulfill their respective regulatory and other obligations relating thereto. 2.6 COMPLIANCE WITH APPLICABLE LAWS. Ligand agrees: (a) To comply fully with all foreign, federal, state, and local laws, regulations and rules applicable to its activities hereunder. (b) To provide prompt notice to Lilly of any civil, criminal, or administrative inquiry, inspection, investigation, or other action by any foreign, federal, state, or local authority arising under or concerning any laws, regulations or rules referred to in *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -5- 6 Section 2.6(a) or any other governmental inquiry, inspection, investigation or action known to Ligand and arising under or concerning any other laws, regulations or rules otherwise applicable in any way to the Products or any acts or omissions of Ligand or Ligand's employees or other agents or affiliates relating to the Products; to provide Lilly with full and complete information regarding the status, prosecution, proceeding and disposition of any such action; and, to the extent Lilly may become a party to or otherwise involved in any such matter, to fully cooperate with and assist Lilly in the prompt and lawful resolution of any such matter. (c) To furnish promptly to Lilly such information as Lilly may reasonably request from time to time to evidence that Ligand is in compliance with the applicable requirements of the laws, regulations and rules referred to in Section 2.6(a) and (subject to other applicable provisions of this Agreement concerning the funding of costs of regulatory compliance) to cooperate with Lilly in meeting any obligations of Ligand and/or Lilly with respect to prior approval, filing requirements or other compliance under any foreign, federal, state or local laws, regulations or rules applicable within the Territory to the Products or any labeling, materials or activities incidental to the marketing of the Products. (d) Not to market, sell or otherwise promote the Products in violation of any of the requirements of the appropriate governmental or regulatory authorities of the applicable jurisdiction(s) in the Territory; not to make any false or misleading representations to customers or others regarding Ligand, Lilly or the Products or any representations, warranties or guarantees with respect to specifications, features or capabilities of the Products except as contained in package labeling, package inserts, promotional material or other communication media approved by Lilly; and not to promote or advertise the Products in any manner or with any labeling, inserts, packaging or ingredients not approved in advance by Lilly. (e) Not to engage directly or indirectly in any transaction, activity, or other act or omission that would violate the Foreign Corrupt Practices Act, Anti-Referral Payments Law, any laws administered by the FDA, or other similar laws of any other jurisdiction in the Territory. 2.7 TAX EXEMPTION CERTIFICATES. Ligand agrees to provide to Lilly a copy of Ligand's sales tax exemption certificate, whether it be a resale certificate, blanket exemption, or direct payment exemption under applicable laws, and to notify Lilly promptly of any change which affects Ligand's exemption status and to provide such other information or certifications as Lilly may reasonably request in order to minimize tax liability and to comply with applicable tax or other regulations of each of the jurisdictions included in the Territory in which Ligand sells Products. 2.8 CONTROLS. Ligand agrees to establish such internal controls and maintain such records as will assure compliance with its obligations under this Agreement and the ability of Lilly to conduct a meaningful review of such records. -6- 7 2.9 EVIDENCE OF FINANCIAL CONDITION. Ligand agrees to furnish Lilly upon request a copy of its complete annual financial statement and other such evidence of its financial condition necessary to establish, in the opinion of Lilly, Ligand's ability to perform its obligations under this Agreement, provided that this Section 2.9 shall not apply to any financial reporting period as to which Ligand remains subject to and in compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended from time to time. 2.10 OFFSET RIGHTS. Upon failure to pay any amount when due, cancellation or termination of this Agreement, or with evidence of a condition of insolvency of Ligand or a Ligand subsidiary, affiliate or location materially affecting Ligand's obligations under this Agreement, Lilly reserves the right to offset any amount due and owing Lilly against amounts otherwise owing under this Agreement to Ligand or Ligand's subsidiaries, affiliates or locations. 2.11 FORECASTS. Ligand agrees to provide sales forecasts at such times and in such detail as Lilly may reasonably request in order to determine manufacturing requirements, *** *** *** *** 3. CERTAIN COVENANTS OF LILLY. 3.1 WHOLESALE, SHIPMENT AND DISTRIBUTION TERMS. Lilly agrees: (a) To sell the Products exclusively to Ligand *** *** within the Territory to the extent that (i) applicable regulatory approvals for sale of the Products in the relevant jurisdiction have been obtained, (ii) the Products are ordered by Ligand during the Term (defined in Section 5.12 below) in compliance with other applicable provisions of this Agreement, and (iii) *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -7- 8 *** *** *** *** *** *** *** *** *** (b) To carry inventory of the Products, dropship the Products to the location specified by Ligand in its orders and send a Ligand invoice to the third party identified by Ligand. (c) To use commercially reasonable efforts to maintain the Products sold to Ligand under proper conditions, both in storage and in transit to customers, *** *** *** and are not damaged, or shopworn; and to provide to Ligand quarterly upon Ligand's request a listing of Lilly's complete and current inventory of Products by item and package size certified to be accurate by Lilly. (d) Not to sell or market the Products directly or indirectly within the Territory to any party other than Ligand, *** *** *** *** *** *** *** (e) Prior to the first commercial sale of the Products in the Territory, the parties shall agree upon the terms of a manufacturing requirements document which shall set forth procedures for ordering and maintaining inventory, and the coordination and timing of manufacture and delivery to meet customer orders, compliance with adverse event reporting and other regulatory requirements and such other matters as are incidental to this Agreement. (f) *** *** *** *** (g) To exercise its option under the Seragen Agreements to promote and distribute the Products in the European Union, if (i) Ligand requests Lilly to do so in writing and (ii) Ligand is, in Lilly's reasonable judgment, capable of supporting sales and promotion and to the extent necessary regulatory operations in the European Union sufficient to perform *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -8- 9 the duties assigned to it under this Agreement. Upon the exercise of Lilly's option under this Section 3.1(g), Ligand shall become Lilly's sole wholesaler in the European Union Countries and the provisions of this Agreement shall be amended with respect to Ligand's obligations in the European Union countries to reflect such changes as are necessary to reflect customary business and distribution practices in such countries. 3.2 TRANSPORTATION COSTS. Lilly shall ship the Products F.O.B. shipping point, transportation prepaid, subject to the following. Lilly will prepay transportation charges in a manner consistent with the method of packaging and shipment and good industry practice when routing is selected by Lilly. If Ligand or customer requests special routing of a shipment which results in a higher transportation cost than would be incurred as a result of the routing of Lilly's selection, then the extra cost shall be added to the invoice. 3.3 TITLE, RISK OF LOSS AND DAMAGE. Title and risk of loss shall pass to Ligand when the Products are duly delivered to the carrier. Ligand shall give Lilly written notice of any claimed shipping error within thirty (30) days after the date of shipment from Lilly. Failure of Ligand to give such notice within such 30-day period shall be deemed a waiver of Ligand's claim for shortages or incorrect shipments. Lilly will not be liable for and will not grant a credit with respect to damage to Products in the course of shipment from Lilly. 3.4 RETURN FOR CREDIT. Ligand shall have no right to return the Products for any reason, except that Ligand may return for credit any Product that (i) is unusable because of Lilly's delay or negligence in shipment, (ii) is not in conformance with product specifications *** *** *** *** Upon request by Ligand, Lilly will ship replacement Products to customers with an invoice to the customer stating that there is no additional charge to the customer for such replacement. Ligand shall pay the cost of such replacement product unless the return is for credit as provided above, and shall in any event pay applicable shipping costs. 3.5 WARRANTY. Lilly warrants that the Products delivered to Ligand pursuant to this Agreement shall (i) at the time of shipment not be adulterated or misbranded within the meaning of applicable federal, state or foreign laws as in effect at the time of delivery *** *** *** *** EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, LILLY MAKES NO WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE PRODUCTS. ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, ARE HEREBY DISCLAIMED BY LILLY. IN NO EVENT SHALL LILLY BE LIABLE FOR INDIRECT, INCIDENTAL *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -9- 10 OR CONSEQUENTIAL DAMAGES, INCLUDING, WITHOUT LIMITATION, LOST REVENUES OR PROFITS OF LIGAND. 3.6 BILLING, REBATES, ETC. Ligand shall be solely responsible for billing and collection activities, rebate programs, return credit procedures and similar activities related to its sales of Products, it being understood that Lilly's responsibilities hereunder relate solely to physical distribution of the Products. 4. APPROVAL AND PRICING MILESTONES TO LILLY. 4.1 APPROVAL MILESTONE. Within thirty (30) days after the date on which Ligand receives notice that the United States Food and Drug Administration ("FDA") has given final approval of the labeling for the *** Ligand shall issue that number of shares (the "Approval Shares") of its voting common stock to Lilly as shall equal the sum of $10 million divided by the average trading price of Ligand's voting common stock over the twenty (20) consecutive trading days immediately preceding the date which is five (5) consecutive days prior to the date the notice referred to above is received. 4.2 PRICING MILESTONE. Within thirty (30) days after the date that the Products are first sold at any time during the Term in the United States *** (the "Product Pricing Date") at an average net selling price or equivalent over a three-month period (the "Cycle Price") *** as reported to Lilly in a manner consistent with the reporting of Net Sales information pursuant to Section 2.3 (but excluding any prices which are clinical study, introductory, or special discount prices), Ligand shall issue shares (the "Pricing Shares") of its voting common stock to Lilly on the following terms and conditions determined with reference to the Cycle Price and the average trading price of Ligand's voting common stock over the twenty (20) consecutive trading days immediately preceding the date which is five (5) consecutive days prior to the Product Pricing Date (the "Average Stock Price"). If the Cycle Price never *** or more during the Term, Lilly shall not be entitled to any Pricing Shares. Otherwise, the number of Pricing Shares to be issued to Lilly shall equal the number obtained by dividing the Target Value by the Average Stock Price, whereby the Target Value is $10 million for a Cycle Price *** and the Target Value declines, but not below $5 million, in inverse proportion to any increase in the Cycle Price *** . Examples of such calculation for certain Cycle Prices are set forth below:
Target Value (in millions) (No. of Pricing Shares= -------------------------------------------------- Cycle Price Relevant Target Value divided by Average Stock Price ----------- ---------------------------------------------------- *** $10.00 *** 8.75 *** 7.50 *** 6.25 *** 5.00
*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -10- 11 4.3 PRODUCT DISAPPROVAL/TARGRETIN DISCONTINUANCE. If the *** is deemed by the FDA to be not approved following review by the FDA, and if Lilly has elected to terminate that certain Development and License Agreement (Targretin) of even date herewith between the parties hereto relating to Targretin pursuant to the provisions thereof granting certain rights of termination to Lilly exercisable on or before December 15, 1998, Lilly, at Ligand's option exercisable by giving written notice of exercise to Lilly referring to this section, within thirty (30) days (subject to extensions by Ligand to not later than one (1) year if Ligand is actively pursuing reversal of the FDA's determination) after the later of the date of the notice that the FDA deems *** unapprovable or termination by Lilly, shall within thirty (30) days after receipt of such notice purchase $5 million of the voting common stock of Ligand at the average trading price for the 20 consecutive trading days immediately preceding the date which is five (5) days prior to the date of delivery of such notice. Thereupon, all rights to the Products, including without limitation *** shall revert to Lilly; the parties shall have no further rights hereunder; and Ligand shall have no further obligation to issue additional shares under Sections 3.1 and 3.2. 4.4 LOW CYCLE PRICE TERMINATION RIGHT. If the average price of the Product sold in the United States *** over the first six months following the Product Pricing Date (the "Low Price Termination Period") (excluding in calculating such average price special introduction, or other promotional pricing not indicative of normal pricing practices) *** Ligand may elect within thirty (30) days after the last day of the Low Price Termination Period to relinquish all of its rights under this Agreement by delivering notice of termination of this Agreement to Lilly, and Lilly shall within thirty (30) days after receipt of such notice purchase $5 million of the voting common stock of Ligand at the average trading price for the twenty (20) consecutive trading days immediately preceding the date which is five (5) consecutive days prior to the date of delivery of such notice. 4.5 CERTAIN ADDITIONAL TERMINATION RIGHTS. *** *** *** *** *** *** *** *** *** Upon termination of this Agreement under this Section 4.5: (a) All rights to Products shall revert to Lilly, and neither party shall have any rights or obligations under this Agreement other than those which may have accrued prior to termination; and (b) If Lilly is the party exercising the right to terminate, *** *** then Lilly shall, *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -11- 12 (i) subject to the terms and conditions set forth in the stock purchase agreement described in Section 4.6, purchase from Ligand, and Ligand shall sell and issue to Lilly, within thirty (30) days of the date of the Termination Notice, for Twenty Million Dollars ($20,000,000), the number of the common voting shares of Ligand ("Shares") equal to Twenty Million Dollars divided by one hundred twenty percent (120%) of the average daily closing price for Shares reported by the National Association of Securities Dealers, Inc. on the twenty (20) consecutive trading days immediately preceding the date which is five (5) days prior to the date of delivery of the Termination Notice; and (ii) Ligand shall have the right to designate either Targretin (as defined in that certain Development and License Agreement (Targretin) dated the date of this Agreement), Compound 268 or Compound 324 (each as defined in that certain Collaboration Agreement dated the date of this Agreement) for increased royalties, which right shall be exercised in the manner set forth and on the terms and conditions provided in Section 5.1(b) of the Targretin Agreement with respect to Targretin, or Section 6.1(b) of the Collaboration Agreement with respect to Compound 268 or Compound 324. (c) If Ligand is the party exercising the right to terminate and (i) *** (ii) the Product receives final approval from the FDA of the *** *** then Lilly shall, within thirty (30) days of receipt of notice of the *** purchase the Ligand stock referred to in subparagraph (b)(i) above and permit Ligand to designate a compound for increased royalties as provided in subparagraph (b)(ii) above. *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -12- 13 *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** 4.6 SHARE ISSUANCE PROCEDURE. Ligand shall issue and deliver to Lilly duly prepared and endorsed stock certificates representing the shares, if any, to be issued under this Section 4 no later than the dates respectively specified in those sections, and in connection therewith Ligand and Lilly shall each execute, deliver to each other and perform a Stock Purchase Agreement containing, in the case of shares issued under Sections 4.1 or 4.2, terms substantially similar to those set forth in Sections 3, 6, 7 and 9.11 of the Stock Purchase Agreement between the parties of even date herewith (the "Stock Purchase Agreement") and, in the case of shares issued pursuant to Sections 4.3, 4.4 or 4.5 as set forth in the form of Stock Purchase Agreement attached as Schedule 4.6. 5. GENERAL PROVISIONS. 5.1 ORDERS FOR PRODUCTS. (a) All orders for Products not inconsistent with the terms of this Agreement shall be promptly accepted and executed by Lilly. (b) In the event of a shortage of any of the Products, Lilly shall have the right to delay or suspend deliveries of the Products to Ligand as reasonably necessary. *** *** *** *** (c) Lilly and Ligand will designate, by mutual agreement, the manner of packaging the Products. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -13- 14 5.2 BILLING, CREDIT, AND PAYMENT. (a) All orders for Products shall be invoiced as of the date shipped. (b) Subject to the other applicable provisions of this Agreement, each invoice will be payable, without the application of Credit Memorandum, by means of an electronic funds transfer ("EFT") system designated or approved by the mutual agreement of Lilly and Ligand, subject to the following: (i) Ligand warrants to Lilly that each entry transmitted by it or its agents or employees on its behalf to a depository financial institution for the purpose of initiating an EFT transaction is duly authorized by Ligand. Without Ligand's prior written consent, Lilly shall not have the right to debit electronically any account of Ligand. (ii) Ligand shall not be deemed in default or lose any cash discount by reason of any delay in receipt or non-receipt by Lilly of funds transferred by EFT unless the delay or nonreceipt is the result of the negligent or willful act or omission of Ligand. (iii) With respect to any EFT entry originated by Lilly's bank, or any delay in receipt by Ligand of approved credit funds transmitted by Lilly by means of EFT, Lilly shall be liable to Ligand only for Lilly's or Lilly's bank's negligent acts or omissions or failure to act in good faith and Lilly's liability to Ligand shall be limited to reasonably foreseeable actual damages proximately caused thereby. (iv) With respect to the use of EFT by Ligand for the payment of funds, Ligand shall be liable to Lilly only for Ligand's negligent acts or omissions or failure to act in good faith and Ligand's liability to Lilly shall be limited to reasonably foreseeable actual damages proximately caused thereby. (v) Except as provided in (iii) and (iv) immediately above, neither party shall be liable to the other for the act or omission of any financial institution or any automated clearing house in connection with the use of EFT for payment of funds and neither party shall be liable for consequential damages to the other arising out of the use of EFT for payment of funds. (vi) Each party agrees promptly to return by EFT any overpayment received by it. (vii) Ligand agrees to execute all authorizations required by Lilly or Lilly's or Ligand's depository financial institution(s) for payment and receipt of funds by EFT and to notify Lilly promptly of any changes in those authorizations. (viii) To the extent applicable to the transfer of funds by EFT under this Agreement, each party agrees to be bound by the Operating Rules and Guidelines of the -14- 15 National Automated Clearing House Association as those Operating Rules and Guidelines may be in effect from time to time. (c) Lilly may require that each order from Ligand be accompanied by a certified check or other form of payment satisfactory to Lilly in an amount sufficient to cover the order less a cash discount of two percent (2%), or require that Ligand provide security in an amount and form satisfactory to Lilly, and may declare due and owing all outstanding indebtedness from Ligand, including invoices on which extended dating has been granted, in the event (a) reasonable grounds for insecurity arise with respect to the performance by Ligand under this Agreement or (b) Ligand initiates or gives notice of its intention to initiate, a filing under bankruptcy and insolvency or (c) Lilly has given notice of termination of this Agreement or (d) Ligand becomes insolvent. (d) Products shipped but not paid for at the time of the cancellation or termination of this Agreement shall be paid for in accordance with the terms of this Agreement. 5.3 INSPECTION OF INVENTORY AND RECORDS. *** Lilly representative(s) will consult with and advise Ligand concerning Ligand's inventory of Products and may inspect the same at a mutually agreed upon time. A Lilly representative may also inspect records of Ligand to determine compliance with Ligand's obligations under this Agreement provided that no such inspection shall relate to transactions occurring more than eighteen (18) months prior to the date of such inspection, and provided further that the inspection shall be performed by Lilly's regularly retained independent auditors or employee. Any Confidential Information disclosed by Ligand under this Section 5.3 shall be maintained in confidence. 5.4 SALES OUTSIDE TERRITORY. This Agreement does not grant or imply to Ligand any rights in any country outside the Territory. 5.5 BUYER-SELLER RELATIONSHIP. The relationship created by this Agreement is solely a buyer-seller relationship and is not any form of joint venture, partnership, franchise, or other agency relationship. Ligand shall not under any circumstance have any authority or otherwise purport to bind Lilly to any express or implied contract or to represent or otherwise bind Lilly before or in connection with any proceeding by any governmental agency. Nothing herein is intended to grant or imply any license or other rights in favor of Ligand to any patent, trademark, copyright, trade secret, technology, know-how or other rights of Lilly *** relating to the Products or the ingredients thereof. 5.6 REPURCHASE OF INVENTORY STOCK. Upon cancellation or termination of this Agreement, by expiration or otherwise, Lilly shall have the option to repurchase Ligand's salable stock of Products, if any, at the net wholesale prices then in effect as between Lilly and Ligand. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -15- 16 5.7 ASSIGNMENT. Neither party shall assign its rights or obligations under this Agreement without first obtaining the written consent of the other party, and any attempted assignment without such written consent shall be void and of no effect, except that a merger, sale of all or substantially all of a party's assets, tender or exchange offer, or other corporate reorganization in which there is a change in control of a party, or a reorganization solely for the purposes of changing a party's corporate domicile, shall not be considered an assignment in violation of this Section 5.7. 5.8 CONTINGENCIES AFFECTING PERFORMANCE. Except as set forth in this Agreement, neither party shall be liable for delay in performance or nonperformance caused by fire, flood, storm, earthquake, or other act of God, war, rebellion, riot, failure of carriers to furnish transportation, strikes, lockouts or other labor disturbances, act of governmental authority, inability to obtain material or equipment, or any other cause of like or different nature beyond the control of such party. 5.9 NOTICES. All notices required or permitted to be given under this Agreement shall be in writing and shall be deemed given, upon receipt, if mailed by registered or certified mail (return receipt requested), postage prepaid, or sent by overnight delivery (receipt verified) to the address below, or given personally or transmitted by facsimile to the number indicated below (with confirmation). To Lilly: Eli Lilly and Company Lilly Corporate Center Indianapolis, IN 46285 Attention: General Counsel Fax: (317) 276-9152 To Ligand: Ligand Pharmaceuticals Incorporated 9393 Towne Centre Drive San Diego, CA 92121 Attention: General Counsel Fax: (619) 625-4521 Any party may, by written notice to the other, designate a new address or fax number to which notices to the party giving the notice shall thereafter be mailed or faxed. 5.10 INDEMNITY AND INSURANCE. (a) Ligand shall hold harmless Lilly and its affiliates and their respective employees and agents from and against any and all liabilities, claims, demands, actions, suits, losses, damages, costs and expenses (including reasonable attorney's fees) based upon -16- 17 (i) sale of the Products in the Territory, including without limitation any product liability claims, regardless of the theory under which such claims are brought, including any claims for death, bodily injury or property damage arising from the use of the Products, (ii) any of Ligand's activities under this Agreement including Ligand's storage, promotion, marketing or distribution of the Products or the use or sale of the Products in the Territory or (iii) which otherwise results from Ligand's negligence or willful misconduct or its material breach of this Agreement, except in the case of (i), (ii) or (iii) to the extent caused by the negligence or willful misconduct of Lilly or the material breach by Lilly of this Agreement or with respect to product liability claims only, to the extent the injury alleged is caused by *** *** (b) Lilly shall indemnify and hold harmless Ligand and its affiliates and their respective employees and agents from and against any and all liabilities, claims, demands, actions, suits, losses, damages, costs and expenses (including reasonable attorney's fees) based upon the death or any bodily injury or property damages resulting from (i) Lilly's *** *** (including product liability claims, regardless of the theory under which such claims are brought), (ii) Lilly's activities outside the Territory or (iii) otherwise results from the negligence or willful misconduct of Lilly or its material breach of this Agreement, except to the extent caused by the negligence or willful misconduct of Ligand or the material breach by Ligand of this Agreement; provided that, with respect to product liability claims only, Lilly shall only have an obligation to indemnify or hold harmless Ligand, its affiliates and their respective employees and agents to the extent the injury alleged is caused by *** *** (c) Each of the parties shall promptly notify the other of any such claim or potential claim covered by any of the above subsections in this Section 5.10 and shall include sufficient information to enable the other party to assess the facts. Each of the parties shall cooperate fully with the other party in the defense of all such claims. No settlement or compromise shall be binding on a party hereto without its prior written consent, which shall not be unreasonably withheld. (d) *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -17- 18 *** *** *** *** (e) Ligand and Lilly shall each have and maintain such type and amounts of liability insurance covering their respective activities under this Agreement as is normal and customary in the pharmaceutical industry generally for parties similarly situated, and will upon request provide the other party with a copy of its policies of insurance in that regard, along with any amendments and revisions thereto. 5.11 RECALLS. In the event of a recall, whether voluntary or ordered by a government agency in the Territory ("Recall"), and Lilly is then providing physical distribution services, Lilly shall be responsible for the coordination of Recall activities. Ligand and Lilly shall each bear and timely pay, as coordinated and required by Lilly, an equal share of the costs of notification, shipping and handling, retrieving the Products subject to Recall already delivered to customers, and other expenses and costs of the Recall. Lilly shall provide Ligand with supporting documentation of all reimbursable expenses and costs. 5.12 TERMINATION OR CANCELLATION. (a) *** *** *** (b) Either party shall have the right to terminate this Agreement after 60 days written notice to the other in the event the other party is in material breach of this Agreement, unless the other party cures the breach before the expiration of such period of time. Such notice shall set forth in reasonable detail the specifics of the breach. Without limiting the generality of the foregoing, any failure by Ligand to comply in all material respects with the provisions of this Agreement concerning compliance with applicable laws, regulations and rules shall constitute a material breach of this Agreement by Ligand. (c) This Agreement shall be terminated upon termination under Sections 4.3, 4.4, and 4.5 as of the applicable dates specified therein. (d) Upon termination of this Agreement for any reason, all then accrued rights under purchase orders and invoices issued in compliance with this Agreement, all then accrued rights of Lilly to acquire stock of Ligand under Section 4, the indemnity and recall provisions of Sections 5.10 and 5.11, and any rights either party may then have as a result of any breach of this Agreement by the other party shall survive termination of this Agreement. Upon termination of this Agreement for any reason, and except as provided in the preceding sentence, Ligand shall have no rights to require Lilly to sell the Products to Ligand or otherwise grant to Ligand any license or other rights to the Products or the technology relating thereto, and the parties shall have no obligations to each other under this Agreement. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -18- 19 (e) *** *** *** *** *** *** *** *** *** 5.13 CERTAIN AGREEMENTS (a) *** *** *** *** *** *** *** *** *** *** *** *** (b) *** *** *** *** *** (c) *** *** *** *** *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -19- 20 (d) *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** (e) *** *** *** *** *** *** *** *** *** (f) *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -20- 21 (g) *** *** *** *** *** *** *** *** *** *** *** *** *** *** (h) To the knowledge of Lilly, the sale of Product by Ligand as contemplated by this Agreement will not infringe the patent or other intellectual property rights of any third party. In the case of any claim of infringement of a patent owned by a third party based upon the making, having made, using, having used, importing, offering for sale, selling or having sold Product, Ligand shall have the right to obtain a license from the third party and credit *** *** of any royalty payable to the third party against the amounts payable to Lilly under this Agreement but in no event will Lilly's royalty be reduced by more than *** If Lilly and/or Ligand is sued for infringement by such third party, Ligand shall control and defend or settle the action at its expense and shall pay any damages or other monetary awards resulting therefrom, and Ligand shall be entitled to credit *** of such monetary awards against amounts payable to Lilly, but in no event will Lilly's payments each year be reduced by more than *** . (i) Ligand shall have the royalty-free right to use the trademark *** in connection with sales of the Products. If for any reason such trademark is not available, Ligand shall be entitled to adopt such other trademark as it may desire, subject to the consent of Lilly, which consent shall not be unreasonably withheld. All expenses of registering and maintaining such alternative mark shall be paid by Ligand. 5.14 CONFIDENTIAL INFORMATION. As used in this Agreement, "Confidential Information" shall mean all information, inventions, know-how and data disclosed by one party to the other party, or its respective affiliates or agents, pursuant to this Agreement, whether in oral, written, graphic or electronic form and whether in existence as of the effective date or developed or acquired in the future, except where such information (i) is public knowledge at the time of disclosure by the disclosing party, (ii) becomes public knowledge through no fault of the receiving party, (iii) was in the possession of the receiving party at the time of disclosure by the disclosing party as evidenced by proper business records or (iv) is disclosed to the receiving party by a third party, to the extent such third party's disclosure was not in violation of any obligation of confidentiality. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -21- 22 5.15 ENTIRE AGREEMENT. This Agreement shall (1) supersede all prior proposals, letters, negotiations, contracts, agreements, and understandings between Ligand and Lilly relating to the subject matter hereof, all of which are hereby terminated; (2) constitute the complete agreement between Ligand and Lilly; and (3) be controlling to the exclusion of all terms and conditions of Ligand's purchase orders or other documents in conflict with this Agreement. 5.16 WAIVER. The failure of any party to enforce at any time any provision of this Agreement shall not be a waiver of such provision or effect the right of such party thereafter to enforce such provision. No waiver shall be deemed a waiver of any other provision or of a subsequent breach whether of the same or another provision. 5.17 GOVERNING LAW. This Agreement shall be interpreted in accordance with, and governed by, the laws of the State of Indiana without regard to principles of conflicts of law. 5.18 NONDISCLOSURE OF AGREEMENT. Neither party shall disclose any information about this Agreement without the prior written consent of the other. Consent shall not be required, however, for (a) disclosures to tax or other governmental authorities, provided, that in connection with such disclosure, each party agrees to use its commercially reasonable efforts to secure confidential treatment of such information, (b) disclosures of information for which consent has previously been obtained or (c) information which has previously been publicly disclosed. Each party shall have the further right to disclose the terms of this Agreement as required by applicable law, including the rules and regulations promulgated by the Securities and Exchange Commission, and to disclose such information to shareholders or potential investors as is customary for publicly-held companies. Without limiting the generality of the foregoing and except in the circumstance where a party's outside counsel advises the party that immediate disclosure is required, in the event that a Receiving Party intends to disclose information about this Agreement as permitted hereunder, such a party will provide to the other party a copy of the information to be disclosed and an opportunity to comment thereon prior to such disclosure, and, to the extent practicable, consult with the other on the necessity for the disclosure and the text of the proposed release within a reasonable time in advance of the proposed disclosure. -22- 23 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above. Ligand: LIGAND PHARMACEUTICALS INCORPORATED 9393 Towne Center Drive San Diego, CA 92121 By: /s/ David E. Robinson ----------------------------------------- LILLY: ELI LILLY AND COMPANY Lilly Corporate Center Indianapolos, Indiana 46284 By /s/ August M. Watanabe ----------------------------------------- August M. Watanabe Executive Vice President [Option and Wholesale Agreement Signature Page] -23- 24 SCHEDULE 3.1(a) *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -24- 25 *** *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -25- 26 Schedule 4.6 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of the ____ day of ___________, ____ (the "Effective Date"), by and between Ligand Pharmaceuticals Incorporated, a Delaware corporation (the "Company"), and Eli Lilly and Company, an Indiana corporation ("Investor"). THE PARTIES HEREBY AGREE AS FOLLOWS: 1. Purchase and Sale of Shares. 1.1 Sale and Issuance of Shares. Subject to the terms and conditions of this Agreement and Section [4.3/4.4] of that certain Option and Wholesale Purchase Agreement dated October __, 1997 (the "Wholesale Agreement"), Investor agrees to pay ____________________________________ ($__________ ) (the "Purchase Price") to the Company at the Closing and the Company agrees to sell and issue to Investor at the Closing the number of shares (the "Shares") of the Company's Common Stock equal to the Purchase Price divided by the average daily closing price of the Company's Common Stock reported by the National Association of Securities Dealers ("NASD") on the twenty (20) consecutive trading days preceding the date of delivery of notice under Section [4.3/414] of the Wholesale Purchase Agreement. 1.2 Closing. The closing for the purchase and sale of the Shares shall take place within thirty (30) days after receipt of notice given pursuant to Section [4.3/4.4] of the Wholesale Agreement at the offices of Brobeck, Phleger & Harrison LLP, 550 West "C" Street, Suite 1200, San Diego, California, or at such other time and place as the Company and Investor mutually agree upon orally or in writing (which time and place are designated as the "Closing"). At the Closing, the Company shall deliver to Investor a certificate representing the Shares. In consideration of such delivery, Investor shall make payment therefor by delivery to the Company by Investor of a check in the amount of the Purchase Price payable to the Company's order or by wire transfer of funds in such amount to the Company's designated bank account. 2. Representations and Warranties of the Company. Except as otherwise set forth on the Schedule of Exceptions attached hereto as Exhibit A, the Company hereby represents and warrants to Investor that: 2.1 Organization, Good Standing and Qualification. The Company 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. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would be reasonably expected to have a material adverse effect on the business, 27 operations, properties, assets, prospects or condition (financial or otherwise) of the Company (a "Material Adverse Effect"). Except as disclosed in the Form 10-K (as defined herein), the Company has no subsidiaries. 2.2 Authorization. The Company has all requisite corporate power and authority (i) to execute, deliver and perform its obligations under this Agreement; (ii) to issue the Shares in the manner and for the purpose contemplated by this Agreement, and (iii) to execute, deliver and perform its obligations under all other agreements and instruments executed and delivered by it pursuant to or in connection with this Agreement. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement, the performance of all obligations of the Company hereunder and the authorization, issuance (or reservation for issuance) and delivery of the Shares has been taken or will be taken prior to the Closing, and this Agreement constitutes a valid and legally binding obligation of the Company, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. 2.3 Valid Issuance of Securities. The Shares which are being purchased hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable and, based in part upon the representations of Investor in this Agreement, the Shares will be issued in compliance with all applicable federal and state securities laws. 2.4 SEC Reports. The Company has heretofore filed with the Securities and Exchange Commission (the "SEC") pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), all reports and other documents required to be filed, including an Annual Report on Form 10-K for the year ended December 31, [fiscal year prior to issuance of Shares] (the "Form 10-K"). None of such reports, or any other reports, documents, registration statements, definitive proxy materials and other filings required to be filed with the SEC under the rules and regulations of the SEC (the "SEC Filings") contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements made, at the time and in light of the circumstances under which they were made, not misleading. Since December 31, [fiscal year prior to issuance of Shares], the Company has timely filed with the SEC all SEC Filings and all such SEC Filings complied in all material respects with all applicable requirements of the Securities Act of 1933, as amended (the "Securities Act"), the Exchange Act, and the rules thereunder. The audited financial statements of the Company included or incorporated by reference in the [fiscal year prior to issuance of Shares] Annual Report to the Stockholders (the "Annual Report") and the unaudited financial statements contained in the Quarterly Reports on Form 10-Q each have been prepared in accordance with such acts and rules and with United States generally accepted accounting principles applied on a consistent basis throughout the periods indicated therein and with each other (except as may be indicated therein or in the notes thereto and except that the unaudited interim financial statements may 28 not contain all footnotes and adjustments required by United States generally accepted accounting principles) and fairly present the financial condition of the Company as at the dates thereof and the results of its operations and statements of cash flows for the periods then ended, subject, in the case of unaudited interim financial statements, to normal year-end adjustments. Except as reflected in such financial statements, the Company has no material liabilities, absolute or contingent, other than ordinary course liabilities incurred since the date of the last such financial statements in connection with the conduct of the business of the Company. Since December 31, [fiscal year prior to issuance of Shares], except as set forth in the Company's SEC Filings, there has been no: (a) change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Annual Report, except changes in the ordinary course of business that have not, individually or in the aggregate, resulted in and are not reasonably expected to result in a Material Adverse Effect (and except that the Company expects to continue to incur substantial operating losses, which may be material); (b) damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the business, properties or financial condition of the Company (and except that the Company expects to continue to incur substantial operating losses, which may be material); (c) waiver or compromise by the Company of a material right or of a material debt owed to it; (d) satisfaction or discharge of any lien, claim or encumbrance by the Company, except in the ordinary course of business and which is not material to the business, properties or financial condition of the Company (as such business is presently conducted); (e) material change to a material contract or arrangement by which the Company or any of its assets is bound or subject; (f) sale, assignment or transfer to a third party that is not an affiliate of the Company (as hereafter defined) of any material patents, trademarks, copyrights, trade secrets or other intangible assets for compensation which is less than fair value; (g) mortgage, pledge, transfer of a security interest in, or lien, created by the Company, with respect to any of its material properties or assets, except liens for taxes not yet due or payable; (h) declaration, setting aside or payment or other distribution in respect of any of the Company's capital stock, except any direct or indirect redemption, purchase or other acquisition of any such stock by the Company; or 29 (i) event or condition of any type that has had or is reasonably expected to have a Material Adverse Effect. For purposes of this Section 2.4 of this Agreement, the term "affiliate of the Company" means any individual or entity directly or indirectly controlling, controlled by or under common control with, the Company. Without limiting the foregoing, the direct or indirect ownership of 50% or more of the outstanding voting securities of any entity, or the right to receive 50% or more of the profits or earnings of an entity, shall be deemed to constitute control. 2.5 Contracts. With respect to each of the material contracts, commitments and agreements of the Company, the Company is not, and has no actual knowledge that any other party is, in default under or in respect of any such material contract, commitment or agreement, the result of which default would have a Material Adverse Effect. No party to any such material contract, commitment or agreement, would be authorized or permitted to terminate its obligations thereunder by reason of the execution and delivery of this Agreement or any of the transactions contemplated herein. 2.6 Compliance. The Company has complied with, and is not in default under or in violation of its Certificate of Incorporation or Bylaws, each as amended through the date hereof, or any and all laws, ordinances and regulations or other governmental restrictions, orders, judgments or decrees, applicable to the Company's business as presently conducted and as proposed to be conducted, including individual products marketed by it, where any such default or violation would have a Material Adverse Effect. The Company has not received notice of any possible or actual violation of any applicable law, ordinance, regulation or order, the result of which violation would be reasonably expected to have a Material Adverse Effect. The Company is not a party to any agreement or instrument, or subject to any charter or other corporate restriction, or any judgment, order, decree, law, ordinance, regulation or other governmental restriction which would prevent or impede, or be breached or violated by, or would result in the creation of any event of default or the creation of any lien or encumbrance upon any assets of the Company by, the transactions contemplated in this Agreement, except that no representation or warranty is made with respect to filings required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "H-S-R Act"). 2.7 Compliance with Other Instruments. The execution, delivery and performance of this Agreement and of the transactions contemplated hereby will not result in any violation of or constitute, with or without the passage of time and the giving of notice, either a default under any provision of the Company's Amended and Restated Certificate of Incorporation or Bylaws, each as amended through the date hereof. 2.8 Governmental Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority is required on the part of the Company in connection with the Company's valid execution, delivery and performance of this Agreement, except for any 30 filings under any applicable state securities laws and except for any filing under the H-S-R Act. The filings under state securities laws, if any, will be effected by the Company at its cost within the applicable stipulated statutory period. 2.9 Litigation. There is no action, suit, proceeding or investigation pending or currently threatened against the Company which questions the validity of this Agreement, or the right of the Company to enter into such agreement or to consummate the transactions contemplated hereby. There is no action, suit, proceeding or investigation pending or currently threatened against the Company, which singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would be reasonably expected to have a Material Adverse Effect. 2.10 Permits. Except as disclosed in the SEC Filings (including, among other things, the lack of FDA approvals for the commercial sale of the Company's product candidates), the Company has all governmental franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted by it or as proposed to be conducted by it, the lack of which could have a Material Adverse Effect. The Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. 2.11 Taxes. The Company has filed all federal, state and other tax returns which are required to be filed and has heretofore paid all taxes which have become due and payable, except where the failure to file or pay would not be reasonably expected to have a Material Adverse Effect. The provision for taxes on the balance sheet as of December 31, [fiscal year prior to issuance of Shares], is sufficient for the payment of all accrued and unpaid taxes of the Company with respect to the period then ended. 2.12 Title. The Company has good and marketable title to all material property and assets reflected in the financial statements to the Annual Report (or as described in the SEC Filings). The Company occupies its leased properties under valid and binding leases conforming to the description thereof set forth in the SEC Filings. 2.13 Intellectual Property. The Company owns, or possesses adequate rights to use, all of its patents, patent rights, trade secrets, know-how, proprietary techniques, including processes and substances, trademarks, service marks, trade names and copyrights described or referred to in the SEC Filings or owned or used by it or which is necessary for the conduct of its business as presently conducted, except where the failure to own or possess such patents, patent rights, trade secrets, know-how, proprietary techniques, including processes and substances, trademarks, service marks, trade names and copyrights would not have a Material Adverse Effect. The Company has not received any notice of infringement of or conflict with asserted rights of others with respect to any patents, patent rights, trade secrets, know-how, proprietary techniques, including processes and substances, trademarks, service marks, trade names and copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would be reasonably expected to have a Material Adverse Effect. 31 2.14 Capitalization; Options and Warrants. The authorized capital stock of the Company consists of Eighty-Five million (85,000,000) shares, of which Eighty million (80,000,000) shares are Common Stock, par value $0.001 per share, and Five million (5,000,000) shares are Preferred Stock, par value $0.001 per share, of which Eighty thousand (80,000) shares have been designated Serial A Participating Preferred Stock. As of [date set forth in most recently published SEC filing, number of shares so set forth] shares of the Company's Common Stock and no shares of Preferred Stock were issued and outstanding. Except for the transactions contemplated hereby and except as set forth in the Company's SEC Filings, since December 31, [fiscal year prior to issuance of Shares], the Company has not granted any option (except for stock options granted under the Company's stock option plans), warrants, rights (including conversion or preemptive rights, except for stock purchased under the Company's stock purchase plans), or similar rights to any person or entity to purchase or acquire any rights with respect to any shares of capital stock of the Company that in the aggregate exceed two million (2,000,000) shares. 2.15 Nasdaq National Market Designation. The Company's Common Stock is currently included in the Nasdaq National Market and the Company knows of no reason or set of facts which is likely to result in the termination of inclusion of the Common Stock in the Nasdaq National Market or the inability of such stock to continue to be included in the Nasdaq National Market. Nothing in this Agreement shall be interpreted to preclude the Company from listing its Common Stock on a national securities exchange in lieu of the Nasdaq National Market. 2.16 Accuracy of Representations and Warranties. No representation or warranty by the Company contained in this Agreement, and no statement contained in any exhibit, schedule, disclosure, certificate, list or other instrument delivered or to be delivered to the Investor pursuant hereto or in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements contained herein or therein not misleading. 3. Representations and Warranties of the Investor. Investor hereby represents and warrants that: 3.1 Organization, Good Standing and Qualification. Investor is a corporation duly organized, validly existing and in good standing under the laws of the State of Indiana and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. 3.2 Authorization. All corporate action on the part of Investor, its officers and directors necessary for the authorization, execution and delivery of this Agreement, the performance of all obligations of Investor hereunder has been taken or will be taken prior to the Closing, and this Agreement constitutes a valid and legally binding obligation of Investor enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the 32 enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. 3.3 Purchase Entirely for Own Account. The Shares to be received by Investor will be acquired for investment for Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, Investor further represents that Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Shares. Investor represents that it has full power and authority to enter into this Agreement. 3.4 Investment Experience. Investor acknowledges that it is able to fend for itself, can bear the economic risk of its investment and 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. Investor also represents it has not been organized for the purpose of acquiring the Shares. 3.5 Accredited Investor. Investor an "accredited investor" within the meaning of SEC Rule 501 of Regulation D, as presently in effect. 3.6 Restricted Securities. Investor understands that the Shares it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such Shares may be resold without registration under the Securities Act, only in certain limited circumstances. In this connection, Investor represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act. 3.7 Further Limitations on Disposition. Without in any way limiting the representations set forth above, Investor further agrees not to make any disposition of all or any portion of the Shares unless and until the transferee has agreed in writing for the benefit of the Company to be bound by Sections 3.7 and 6 of this Agreement, if applicable, and: (a) There is then in effect a Registration Statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such Registration Statement; or (b) (i) Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a reasonably detailed statement of the circumstances surrounding the proposed disposition, and (ii) if reasonably requested by the Company, such Investor shall have furnished the Company with an opinion of counsel (which may be Investor's inside counsel), in form and substance reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the 33 Securities Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. Notwithstanding the foregoing, this Section 3.7 and Section 6 shall not apply to a transferee in a registered public offering or a sale under Rule 144; provided that Section 4.2 of that certain Stock Purchase Agreement dated _____________, 1997 between the Company and the Investor (the "Purchase Agreement"), which is incorporated herein pursuant to Section 6 of this Agreement, shall not apply to a transferee which receives less than one percent (1%) of the outstanding Common Stock of the Company at such time as the Investor owns Shares which represent less than three percent (3%) of the outstanding Common Stock of the Company; provided further Section 5 of the Purchase Agreement, which is incorporated herein pursuant to Section 6 of this Agreement, by its terms does not apply at such time as the Investor owns Restricted Securities which represent less than three percent (3%) of the outstanding Common Stock of the Company. 3.8 Legends. It is understood that the certificates evidencing the Shares may bear one or all of the following legends: (a) "These securities have not been registered under the Securities Act of 1933, as amended. They may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the securities under such Act or an opinion of counsel satisfactory to the Company that such registration is not required or unless sold pursuant to Rule 144 of such Act." (b) "These securities are subject to certain transfer restrictions contained in a certain Stock Purchase Agreement dated _____________, ____, as amended from time to time, a copy of which may be obtained from the corporation without charge." (c) Any legend required by any applicable state securities laws. To the extent that such legends are no longer applicable, the Company shall cause its transfer agent to remove the legends upon request by Investor. 3.9 Governmental Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority is required on the part of Investor in connection with the Investor's valid execution, delivery and performance of this Agreement or the issuance of the Shares, except for any filings under any applicable federal or state securities law and except for any filing under the H-S-R Act. 4. Conditions of Investor's Obligations at Closing. The obligations of Investor under Section 1 of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions, the waiver of which shall not be effective without the consent of Investor thereto: 34 4.1 Representations and Warranties. The representations and warranties of the Company contained in Section 2 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of such Closing. 4.2 Performance. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing, and all corporate or other proceedings in connection with the transactions contemplated at the Closing. In addition, all documents shall be reasonably satisfactory in form and in substance to Investor. 4.3 Compliance Certificate. An officer of the Company shall have delivered to Investor a certificate certifying that (a) the conditions specified in Sections 4.1 and 4.2 have been fulfilled; (b) the Company has not filed a petition in bankruptcy or insolvency or for reorganization or for an arrangement or for the appointment of a receiver or trustee of its assets, nor is the Company aware of any events or action that would make any such filing or arrangement imminent; and (c) no action or event has occurred, nor is any action or event imminent, that would impair the Company's ability to perform as contemplated under the Wholesale Agreement. 4.4 Governmental Authorizations. 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 as of the Closing in connection with the lawful issuance and sale of the Shares pursuant to this Agreement shall have been duly obtained and shall be effective as of the Closing. The parties shall have timely complied with all filing requirements of the H-S-R Act, all time periods for governmental comment thereunder shall have expired and no requirements or conditions shall have been imposed in connection therewith which are not reasonably satisfactory to the Investor. 4.5 Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated by this Agreement at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to Investor and they shall have received all such counterpart original and certified or other copies of such documents as they may reasonably request. 4.6 Wholesale Agreement. The Company shall not be in breach or default of any of its obligations under the Wholesale Agreement. 4.7 Opinion of Company Counsel. Investor shall have received an opinion from the Company's General Counsel, dated as of the Closing, in form and substance reasonably acceptable to Investor. 5. Conditions of the Company's Obligations at Closing. The obligations of the Company to Investor under Section 1.1 of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions by Investor: 35 5.1 Representations and Warranties. The representations and warranties of Investor contained in Section 3 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 5.2 Performance. Investor shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing and all corporate or other proceedings in connection with the transactions contemplated at the Closing. In addition, all documents shall be reasonably satisfactory in form and in substance to the Company. 5.3 Compliance Certificate. An officer of Investor shall have delivered to the Company a certificate certifying that the conditions specified in Sections 5.1 and 5.2 have been fulfilled. 5.4 Payment of Purchase Price. Investor shall have delivered the Purchase Price specified in Section 1.1. 5.5 Qualifications. 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 as of the Closing in connection with the lawful issuance and sale of the Shares pursuant to this Agreement shall have been duly obtained and shall be effective as of the Closing. 5.6 Wholesale Agreement. Investor shall not be in breach or default of any of its obligations under the Wholesale Agreement. 6. Covenant of Investor. Investor acknowledges and agrees that, to the extent its rights and obligations under Sections 4, 5 and 7.11 continue in effect under the Purchase Agreement, they shall apply with equal force to Investor, any actions with respect to the Shares or otherwise as set forth in such agreement. 7. Additional Covenants. 7.1 Nasdaq National Market Designation. The Company shall give the Nasdaq National Market timely notice of the issuance of the Shares and shall use all commercially reasonable efforts to maintain the Non-Quantitative Designation Criteria contained in Rule 4460 of the NASD Manual to the extent such criteria are within the control of the Company. 7.2 Reports Under Exchange Act. With a view to making available to the Investor the benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit the Investor to sell the Shares to the public without registration, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144, at all times; (a) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; 36 and (c) furnish to the Investor, so long as the Investor owns any Shares, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing the Investor of any rule or regulation of the SEC which permits the selling of any Shares without registration. 7.3 Filings under the H-S-R Act. Each of the Company and the Investor shall use its commercially reasonable efforts to make all filings required under the H-S-R Act within two (2) business days of the execution of this Agreement, and thereafter to promptly respond to any requests for additional information in connection with such filings. 8. Miscellaneous. 8.1 Survival of Warranties. The warranties, representations and covenants of the Company and Investor contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Investor or the Company. 8.2 Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any of the Shares sold hereunder). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 8.3 Governing Law. This Agreement shall be governed by and construed under the laws of the State of Delaware as applied to agreements among Delaware residents entered into and to be performed entirely within Delaware. 8.4 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8.5 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 8.6 Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing by personal delivery to the party to be notified or by Federal Express or other overnight package delivery service or by registered or certified mail, postage prepaid and addressed to the party to be notified at the following 37 addresses, or at such other address as such party may designate by five (5) days' advance written notice to the other parties (with notice deemed given upon receipt): If to the Company: Ligand Pharmaceuticals Incorporated 9393 Towne Centre Drive San Diego, California 92121 Attn: William L. Respess, Esq. If to Investor: Eli Lilly and Company Lilly Corporate Center Indianapolis, IN 46285 Attention: General Counsel 8.7 Finder's Fee. Each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. Each party agrees to indemnify and to hold harmless the other party from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the indemnifying party or any of its officers, partners, employees or representatives is responsible. 8.8 Expenses. Irrespective of whether the Closing is effected, each party shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 8.9 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively but only if so expressly stated), only with the written consent of the Company and Investor. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding, each future holder of all such securities, and the Company. 8.10 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provisions were so excluded and shall be enforceable in accordance with its terms. 38 8.11 Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement among the parties and no party shall be liable or bound to any other party regarding the subject matter hereof and thereof in any manner by any warranties, representations, or covenants except as specifically set forth herein or therein. 39 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE COMPANY: LIGAND PHARMACEUTICALS INCORPORATED By: ______________________________________ Title: ______________________________________ INVESTOR: ELI LILLY AND COMPANY By: ______________________________________ Title: ______________________________________ [SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT] 40 AMENDMENT TO OPTION AND WHOLESALE PURCHASE AGREEMENT This Amendment is executed as of the 23rd day of February, 1998 by and between Eli Lilly and Company ("Lilly") and Ligand Pharmaceuticals Incorporated ("Ligand"). Whereas, Lilly and Ligand have entered into an Option and Wholesale Purchase Agreement dated as of November 25, 1997 (the "Agreement"), and Whereas the parties now desire to amend the Agreement to extend the period of time pursuant to which Ligand may exercise the Ligand Option (as defined in the Agreement). Now, therefore, in consideration of the foregoing, the mutual covenants set forth below and other consideration, receipt sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Section 1.1 of the Agreement is hereby amended to read in its entirety as follows: "Until the later of (a) April 27, 1998, or (b) the date which is three (3) business days after the date Ligand delivers to Lilly the notice referred to in Section 1.4 (the "Ligand Option Period"), Ligand shall have the option (the "Ligand Option") to become Lilly's exclusive wholesaler of the Products, subject to the terms and conditions contained in this Agreement. 2. All other terms and conditions of the Agreement shall remain in full force and effect. 3. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one in the same. LIGAND PHARMACEUTICALS INC. ELI LILLY AND COMPANY By: /s/ William L. Respess By: /s/ August M. Watanabe ------------------------------------ ------------------------- Sr. Vice President, August M. Watanabe General Counsel, Government Relations Executive Vice President Science and Technology Date: February 28, 1998 Date: February 28, 1998 ----------------- ----------------- 41 AMENDMENT #2 TO OPTION AND WHOLESALE PURCHASE AGREEMENT This Amendment is executed as of the 16th day of March, 1998 by and between Eli Lilly and Company ("Lilly") and Ligand Pharmaceuticals Incorporated ("Ligand"). Whereas, Lilly and Ligand have entered into an Option and Wholesale Purchase Agreement dated as of November 25, 1997, and amended on February 23, 1998 (the "Agreement"), and Whereas the parties now desire to amend the Agreement to extend the period of time pursuant to which Ligand may exercise the Ligand Option (as defined in the Agreement). Now, therefore, in consideration of the foregoing, the mutual covenants set forth below and other consideration, receipt sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Section 1.1 of the Agreement is hereby amended to read in its entirety as follows: "Ligand Option. Until the date that is seven (7) days after the date on which Lilly gives written notice (the "Option Termination Notice") to Ligand of Lilly's desire to terminate the Ligand Option (the "Ligand Option Period"), Ligand shall have the option (the "Ligand Option") to become Lilly's exclusive wholesaler of the Products, subject to the terms and conditions contained in this Agreement. Lilly shall not give the Option Termination Notice prior to April 27, 1998. If Lilly gives the Option Termination Notice prior to May 28, 1998, it will, upon written request made by both Ligand and Seragen and delivered to Lilly within five (5) days of the date of the Option Termination Notice, defer effectiveness of the Option Termination Notice until May 28, 1998, (with the effect that the Ligand Option would expire on June 4, 1998, if not previously exercised). *** *** *** *** *** *** 2. All other terms and conditions of the Agreement shall remain in full force and effect. 3. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one in the same. LIGAND PHARMACEUTICALS INC. ELI LILLY AND COMPANY By: /s/ William L. Respess By: /s/ August M. Watanabe --------------------------- ----------------------------- Sr. Vice President, General August M. Watanabe Counsel, Government Affairs Executive Vice President Science and Technology Date: February 28, 1998 Date: February 28, 1998 ----------------- ----------------- *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. EX-10.170 7 EXHIBIT 10.170 1 EXHIBIT 10.170 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of the 25th day of November, 1997 (the "Effective Date"), by and between Ligand Pharmaceuticals Incorporated, a Delaware corporation (the "Company"), and Eli Lilly and Company, an Indiana corporation ("Investor"). THE PARTIES HEREBY AGREE AS FOLLOWS: 1. Purchase and Sale of Shares. 1.1 Sale and Issuance of Shares. Subject to the terms and conditions of this Agreement, Investor agrees to pay Thirty-Seven Million Five Hundred Thousand Dollars ($37,500,000) (the "Purchase Price") to the Company at the Closing and the Company agrees to sell and issue to Investor at the Closing the number of shares (the "Shares") of the Company's Common Stock equal to the Purchase Price divided by one hundred twenty percent (120%) of the average daily closing price of the Company's Common Stock reported by the National Association of Securities Dealers ("NASD") beginning on August 15, 1997 and continuing through and including September 12, 1997, which amount is $17.23125 per share, resulting in a total of two million one hundred seventy-six thousand two hundred seventy-nine (2,176,279) Shares. 1.2 Closing. The closing for the purchase and sale of the Shares shall take place at the offices of Brobeck, Phleger & Harrison LLP, 550 West "C" Street, Suite 1200, San Diego, California, on the third business day following the date of this Agreement, or at such other time and place as the Company and Investor mutually agree upon orally or in writing (which time and place are designated as the "Closing"). At the Closing, the Company shall deliver to Investor a certificate representing the Shares. In consideration of such delivery, Investor shall make payment therefor by delivery to the Company by Investor of a check in the amount of the Purchase Price payable to the Company's order or by wire transfer of funds in such amount to the Company's designated bank account. 2. Representations and Warranties of the Company. Except as otherwise set forth on the Schedule of Exceptions attached hereto as Exhibit A, the Company hereby represents and warrants to Investor that: 2.1 Organization, Good Standing and Qualification. The Company 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. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would be reasonably expected to have a material adverse effect on the business, operations, properties, assets, prospects or condition (financial or otherwise) of the Company 2 (a "Material Adverse Effect"). Except as disclosed in the Form 10-K (as defined herein), the Company has no subsidiaries. 2.2 Authorization. The Company has all requisite corporate power and authority (i) to execute, deliver and perform its obligations under this Agreement; (ii) to issue the Shares in the manner and for the purpose contemplated by this Agreement, and (iii) to execute, deliver and perform its obligations under all other agreements and instruments executed and delivered by it pursuant to or in connection with this Agreement. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement, the performance of all obligations of the Company hereunder and the authorization, issuance (or reservation for issuance) and delivery of the Shares has been taken or will be taken prior to the Closing, and this Agreement constitutes a valid and legally binding obligation of the Company, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. 2.3 Valid Issuance of Securities. The Shares which are being purchased hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable and, based in part upon the representations of Investor in this Agreement, the Shares will be issued in compliance with all applicable federal and state securities laws. 2.4 SEC Reports. The Company has heretofore filed with the Securities and Exchange Commission (the "SEC") pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), all reports and other documents required to be filed, including an Annual Report on Form 10-K for the year ended December 31, 1996 (the "Form 10-K"). None of such reports, or any other reports, documents, registration statements, definitive proxy materials and other filings required to be filed with the SEC under the rules and regulations of the SEC (the "SEC Filings") contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements made, at the time and in light of the circumstances under which they were made, not misleading. Since December 31, 1996, the Company has timely filed with the SEC all SEC Filings and all such SEC Filings complied in all material respects with all applicable requirements of the Securities Act of 1933, as amended (the "Securities Act"), the Exchange Act, and the rules thereunder. The audited financial statements of the Company included or incorporated by reference in the 1996 Annual Report to the Stockholders (the "1996 Annual Report") and the unaudited financial statements contained in the Quarterly Reports on Form 10-Q each have been prepared in accordance with such acts and rules and with United States generally accepted accounting principles applied on a consistent basis throughout the periods indicated therein and with each other (except as may be indicated therein or in the notes thereto and except that the unaudited interim financial statements may not contain all footnotes and adjustments required by United States generally accepted accounting principles) and fairly present the financial condition of the Company as at the -2- 3 dates thereof and the results of its operations and statements of cash flows for the periods then ended, subject, in the case of unaudited interim financial statements, to normal year-end adjustments. Except as reflected in such financial statements, the Company has no material liabilities, absolute or contingent, other than ordinary course liabilities incurred since the date of the last such financial statements in connection with the conduct of the business of the Company. Since December 31, 1996, except as set forth in the Company's SEC Filings, there has been no: (a) change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the 1996 Annual Report, except changes in the ordinary course of business that have not, individually or in the aggregate, resulted in and are not reasonably expected to result in a Material Adverse Effect (and except that the Company expects to continue to incur substantial operating losses, which may be material); (b) damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the business, properties or financial condition of the Company (and except that the Company expects to continue to incur substantial operating losses, which may be material); (c) waiver or compromise by the Company of a material right or of a material debt owed to it; (d) satisfaction or discharge of any lien, claim or encumbrance by the Company, except in the ordinary course of business and which is not material to the business, properties or financial condition of the Company (as such business is presently conducted); (e) material change to a material contract or arrangement by which the Company or any of its assets is bound or subject; (f) sale, assignment or transfer to a third party that is not an affiliate of the Company (as hereafter defined) of any material patents, trademarks, copyrights, trade secrets or other intangible assets for compensation which is less than fair value; (g) mortgage, pledge, transfer of a security interest in, or lien, created by the Company, with respect to any of its material properties or assets, except liens for taxes not yet due or payable; (h) declaration, setting aside or payment or other distribution in respect of any of the Company's capital stock, except any direct or indirect redemption, purchase or other acquisition of any such stock by the Company; or -3- 4 (i) event or condition of any type that has had or is reasonably expected to have a Material Adverse Effect. For purposes of this Section 2.4 of this Agreement, the term "affiliate of the Company" means any individual or entity directly or indirectly controlling, controlled by or under common control with, the Company. Without limiting the foregoing, the direct or indirect ownership of 50% or more of the outstanding voting securities of any entity, or the right to receive 50% or more of the profits or earnings of an entity, shall be deemed to constitute control. 2.5 Contracts. With respect to each of the material contracts, commitments and agreements of the Company, the Company is not, and has no actual knowledge that any other party is, in default under or in respect of any such material contract, commitment or agreement, the result of which default would have a Material Adverse Effect. No party to any such material contract, commitment or agreement, would be authorized or permitted to terminate its obligations thereunder by reason of the execution and delivery of this Agreement or any of the transactions contemplated herein. 2.6 Compliance. The Company has complied with, and is not in default under or in violation of its Certificate of Incorporation or Bylaws, each as amended through the date hereof, or any and all laws, ordinances and regulations or other governmental restrictions, orders, judgments or decrees, applicable to the Company's business as presently conducted and as proposed to be conducted, including individual products marketed by it, where any such default or violation would have a Material Adverse Effect. The Company has not received notice of any possible or actual violation of any applicable law, ordinance, regulation or order, the result of which violation would be reasonably expected to have a Material Adverse Effect. The Company is not a party to any agreement or instrument, or subject to any charter or other corporate restriction, or any judgment, order, decree, law, ordinance, regulation or other governmental restriction which would prevent or impede, or be breached or violated by, or would result in the creation of any event of default or the creation of any lien or encumbrance upon any assets of the Company by, the transactions contemplated in this Agreement, except that no representation or warranty is made with respect to filings required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "H-S-R Act"). 2.7 Compliance with Other Instruments. The execution, delivery and performance of this Agreement and of the transactions contemplated hereby will not result in any violation of or constitute, with or without the passage of time and the giving of notice, either a default under any provision of the Company's Amended and Restated Certificate of Incorporation or Bylaws, each as amended through the date hereof. 2.8 Governmental Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or -4- 5 local governmental authority is required on the part of the Company in connection with the Company's valid execution, delivery and performance of this Agreement, except for any filings under any applicable state securities laws and except for any filing under the H-S-R Act. The filings under state securities laws, if any, will be effected by the Company at its cost within the applicable stipulated statutory period. 2.9 Litigation. There is no action, suit, proceeding or investigation pending or currently threatened against the Company which questions the validity of this Agreement, or the right of the Company to enter into such agreement or to consummate the transactions contemplated hereby. There is no action, suit, proceeding or investigation pending or currently threatened against the Company, which singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would be reasonably expected to have a Material Adverse Effect. 2.10 Permits. Except as disclosed in the SEC Filings (including, among other things, the lack of FDA approvals for the commercial sale of the Company's product candidates), the Company has all governmental franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted by it or as proposed to be conducted by it, the lack of which could have a Material Adverse Effect. The Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. 2.11 Taxes. The Company has filed all federal, state and other tax returns which are required to be filed and has heretofore paid all taxes which have become due and payable, except where the failure to file or pay would not be reasonably expected to have a Material Adverse Effect. The provision for taxes on the balance sheet as of December 31, 1996 is sufficient for the payment of all accrued and unpaid taxes of the Company with respect to the period then ended. 2.12 Title. The Company has good and marketable title to all material property and assets reflected in the financial statements to the 1996 Annual Report (or as described in the SEC Filings). The Company occupies its leased properties under valid and binding leases conforming to the description thereof set forth in the SEC Filings. 2.13 Intellectual Property. The Company owns, or possesses adequate rights to use, all of its patents, patent rights, trade secrets, know-how, proprietary techniques, including processes and substances, trademarks, service marks, trade names and copyrights described or referred to in the SEC Filings or owned or used by it or which is necessary for the conduct of its business as presently conducted, except where the failure to own or possess such patents, patent rights, trade secrets, know-how, proprietary techniques, including processes and substances, trademarks, service marks, trade names and copyrights would not have a Material Adverse Effect. The Company has not received any notice of infringement of or conflict with asserted rights of others with respect to any patents, patent rights, trade -5- 6 secrets, know-how, proprietary techniques, including processes and substances, trademarks, service marks, trade names and copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would be reasonably expected to have a Material Adverse Effect. 2.14 Capitalization; Options and Warrants. The authorized capital stock of the Company consists of Eighty-Five million (85,000,000) shares, of which Eighty million (80,000,000) shares are Common Stock, par value $0.001 per share, and Five million (5,000,000) shares are Preferred Stock, par value $0.001 per share, of which Eighty thousand (80,000) shares have been designated Serial A Participating Preferred Stock. As of July 31, 1997, 32,859,502 shares of the Company's Common Stock and no shares of Preferred Stock were issued and outstanding. Except for the transactions contemplated hereby and except as set forth in the Company's SEC Filings, since December 31, 1996, the Company has not granted any option (except for stock options granted under the Company's stock option plans), warrants, rights (including conversion or preemptive rights, except for stock purchased under the Company's stock purchase plans), or similar rights to any person or entity to purchase or acquire any rights with respect to any shares of capital stock of the Company that in the aggregate exceed two million (2,000,000) shares. 2.15 Nasdaq National Market Designation. The Company's Common Stock is currently included in the Nasdaq National Market and the Company knows of no reason or set of facts which is likely to result in the termination of inclusion of the Common Stock in the Nasdaq National Market or the inability of such stock to continue to be included in the Nasdaq National Market. Nothing in this Agreement shall be interpreted to preclude the Company from listing its Common Stock on a national securities exchange in lieu of the Nasdaq National Market. 2.16 Accuracy of Representations and Warranties. No representation or warranty by the Company contained in this Agreement, and no statement contained in any exhibit, schedule, disclosure, certificate, list or other instrument delivered or to be delivered to the Investor pursuant hereto or in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements contained herein or therein not misleading. 3. Representations and Warranties of the Investor. Investor hereby represents and warrants that: 3.1 Organization, Good Standing and Qualification. Investor is a corporation duly organized, validly existing and in good standing under the laws of the State of Indiana and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. -6- 7 3.2 Authorization. All corporate action on the part of Investor, its officers and directors necessary for the authorization, execution and delivery of this Agreement, the performance of all obligations of Investor hereunder has been taken or will be taken prior to the Closing, and this Agreement constitutes a valid and legally binding obligation of Investor enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. 3.3 Purchase Entirely for Own Account. The Shares to be received by Investor will be acquired for investment for Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, Investor further represents that Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Shares. Investor represents that it has full power and authority to enter into this Agreement. 3.4 Investment Experience. Investor acknowledges that it is able to fend for itself, can bear the economic risk of its investment and 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. Investor also represents it has not been organized for the purpose of acquiring the Shares. 3.5 Accredited Investor. Investor an "accredited investor" within the meaning of SEC Rule 501 of Regulation D, as presently in effect. 3.6 Restricted Securities. Investor understands that the Shares it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such Shares may be resold without registration under the Securities Act, only in certain limited circumstances. In this connection, Investor represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act. 3.7 Further Limitations on Disposition. Without in any way limiting the representations set forth above, Investor further agrees not to make any disposition of all or any portion of the Shares unless and until the transferee has agreed in writing for the benefit of the Company to be bound by Sections 3.7, 4.2 and 5 of this Agreement, if applicable, and: (a) There is then in effect a Registration Statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such Registration Statement; or -7- 8 (b) (i) Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a reasonably detailed statement of the circumstances surrounding the proposed disposition, and (ii) if reasonably requested by the Company, such Investor shall have furnished the Company with an opinion of counsel (which may be Investor's inside counsel), in form and substance reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Securities Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. Notwithstanding the foregoing, this Section 3.7 and Sections 4.2 and 5 shall not apply to a transferee in a registered public offering or a sale under Rule 144; provided that Section 4.2 shall not apply to a transferee which receives less than one percent (1%) of the outstanding Common Stock of the Company at such time as the Investor owns Shares which represent less than three percent (3%) of the outstanding Common Stock of the Company; provided further Section 5 by its terms does not apply at such time as the Investor owns Restricted Securities which represent less than three percent (3%) of the outstanding Common Stock of the Company. 3.8 Legends. It is understood that the certificates evidencing the Shares may bear one or all of the following legends: (a) "These securities have not been registered under the Securities Act of 1933, as amended. They may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the securities under such Act or an opinion of counsel satisfactory to the Company that such registration is not required or unless sold pursuant to Rule 144 of such Act." (b) "These securities are subject to certain transfer restrictions contained in a certain Stock Purchase Agreement dated November 25, 1997 as amended from time to time, a copy of which may be obtained from the corporation without charge." (c) Any legend required by any applicable state securities laws. To the extent that such legends are no longer applicable, the Company shall cause its transfer agent to remove the legends upon request by Investor. 3.9 Governmental Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority is required on the part of Investor in connection with the Investor's valid execution, delivery and performance of this Agreement or the issuance of the Shares, except for any filings under any applicable federal or state securities law and except for any filing under the H-S-R Act. -8- 9 4. Covenants of Investor. 4.1 Transfer Restriction. Investor hereby agrees that during the time period commencing as of the Closing until the first anniversary of the Effective Date (with such time period being referred to as the "Initial Restricted Period"), that neither it nor any affiliate shall, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any of the Shares, any securities acquired pursuant to Section 7.11 or any securities issued to Investor pursuant to that certain Wholesale Purchase Agreement between the Company and Investor dated the date hereof (the "Wholesale Agreement") ("Restricted Securities") at any time during the Initial Restricted Period. Investor hereby also agrees that during the time period commencing as of the last day of the Initial Restricted Period until the second anniversary date of the Effective Date (with such time period being referred to as the "Follow-On Restricted Period"), that neither it nor any affiliate shall, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any of the Restricted Securities at any time during the Follow-On Restricted Period other than in compliance with the volume restrictions then set forth under Rule 144 (or its successor rule) promulgated under the Securities Act ("Rule 144") (even if such volume limitations are not applicable to Investor under such rule). In order to enforce the foregoing covenant, the Company may impose legends and/or stop-transfer instructions with respect to the Restricted Securities held by Investor (and the Restricted Securities of every other person subject to the foregoing restriction) until the end of such periods. Following the last day of the Follow-On Restricted Period, any restrictions under this Section 4.1 shall terminate and be of no further force and effect. 4.2 Standstill Provisions. Commencing as of the Closing and through the fifth anniversary of the Effective Date, Investor (including all affiliates (as defined in Rule 144) of Investor ("Affiliate")) shall not acquire beneficial ownership of any shares of Common Stock of the Company, any securities convertible into or exchangeable for Common Stock, or any other right to acquire Common Stock, except by way of stock dividends or other distributions or offerings made available to holders of Common Stock generally (collectively, "Company Stock"), from the Company or any other person or entity, such that such beneficial ownership of Investor (together with all Affiliates) shall be greater than ten percent (10%) of the Company's outstanding Common Stock without the prior written consent of the Company, which consent may be withheld in its sole discretion; provided, however, that in no event shall (i) the original purchase of Shares pursuant to this Agreement, (ii) the subsequent issuance of shares of the Company's Common Stock pursuant to the Wholesale Agreement or (iii) the acquisition by Investor (or an Affiliate) of another Company that at the time of the acquisition owns securities of the Company constitute a violation of this Section 4.2. In addition, the prohibition on acquisition of beneficial ownership under this Section 4.2 shall not prevent an Affiliate of Investor from acquiring -9- 10 beneficial ownership of securities of the Company, provided such Affiliate is formed primarily for the purpose of investing in the securities of companies other than Investor or its Affiliates. 4.3 Termination Upon Certain Events. Notwithstanding the foregoing, in the event that: (i) a Person has taken all steps legally required to commence a formal tender offer, or has publicly announced its intention to commence a formal tender offer; or (ii) the Board of Directors of the Company has made a decision to actively consider disposing of all or substantially all of the assets of the Company, or merging or consolidating with another entity (other than a merger or consolidation effected for tax purposes or to change the domicile of the Company to any state in the United States), as evidenced by its public announcement of the transaction or its action to formally engage an investment banker to locate a Person interested in acquiring the Company, whichever occurs first; or (iii) any "Person" (as defined herein) becomes the "Beneficial Owner" (as defined herein) of 30% or more of the shares of Common Stock of the Company after the date hereof; Section 4.2 shall cease to have effect and Investor (or any Affiliates) may acquire and beneficially own more than ten percent (10%) of the Common Stock of the Company (assuming the full conversion and exercise of all convertible and exercisable securities of the Company held by Investor and its Affiliates). 4.4 Definitions. (a) "Person" as used herein shall mean any individual, corporation, partnership, firm, association, unincorporated organization, joint venture, trust or other entity, and shall include any successor (by merger or otherwise) of such entity, or any of the foregoing acting together as a group, but shall specifically exclude Investor (or any Affiliate of Investor). (b) A Person shall be deemed to be the "Beneficial Owner" of and shall be deemed to "beneficially own" any securities: (i) which such Person or any of such Person's Affiliates beneficially owns, directly or indirectly; -10- 11 (ii) which such Person or any of such Person's Affiliates has (A) the right to acquire, exercisable immediately, pursuant to any agreement, arrangement or understanding (other than customary arrangements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights or exchange rights, warrants or options or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates until such tendered securities are accepted for purchase or exchange; or (B) the right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person's Affiliates has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso to Section 4.4(b)(ii)(B)) or disposing of any securities of the Company. Notwithstanding anything in this definition of Beneficial Ownership to the contrary, the phrase, "then outstanding," when used with reference to a Person's Beneficial Ownership of securities of the Company, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person would be deemed to own beneficially hereunder. 4.5 Market Stand-Off. The Investor hereby agrees that during the period of duration not to exceed 120 days specified by the Company and an underwriter of capital stock of the Company, following the effective date of a registration statement pursuant to which the Company is offering securities under the Securities Act, it shall not, to the extent requested by the Company and such underwriter (and provided the same restriction is agreed to by the officers and directors of the Company), directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale but excluding private placements in reliance on the so-called "4(1-1/2)" exemption under the Securities Act), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company held by it at any time during such period except Common Stock included in such registration. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Shares until the end of such period. -11- 12 5. Right of First Offer. 5.1 Rights of First Offer. (a) The Investor shall not make any disposition of all or any portion (or any interest) of the Restricted Securities, without first giving the Company the right to accept an offer to purchase such securities, except for any dispositions that are exempt pursuant to the terms of Section 5.3. Subject to Section 4.1, at the time the Investor wishes to make a disposition of any or all of the Restricted Securities, it shall submit an offer to sell all, but not less than all, of such Restricted Securities which Investor wishes to dispose (the "Offered Shares") to the Company (the "Offer") by facsimile to the Company's President or Chief Operating Officer (such facsimile to be received during the Company's normal business hours and to be confirmed in writing by notice pursuant to Section 7.6) as follows: (i) If the Investor wishes to sell the Offered Shares in an open market disposition, the Offer shall disclose the number of Offered Shares proposed to be sold. As soon as practicable after receipt of the Offer, but in no event later than five (5) business days after the Investor makes the Offer, the Company shall have the option to accept the Offer to purchase the Offered Shares at the higher of (a) the closing market price on the business day next preceding the day of the Offer or (b) the closing market price on the business day next preceding the day the Offer is accepted by the Company. In the event the Company does not purchase the Offered Shares offered by the Investor pursuant to the Offer, the Investor may sell the Offered Shares at any time within 90 days after the expiration of the Offer. Any such sale shall be made in the open market at the market prices prevailing at the time of the sale. (ii) If the Investor wishes to sell or otherwise transfer the Offered Shares in a privately negotiated transaction, whether through brokers-dealers who may act as agent or acquire the Offered Shares as principal, or otherwise, the Offer shall disclose the number of Offered Shares proposed to be sold or transferred and the price at which the Offered Shares are offered to the Company. As soon as practicable after receipt of the Offer, but in no event later than five (5) business days after the Investor makes the Offer, the Company shall have the option to accept the Offer to purchase the Offered Shares at the higher of (a) the price per share set forth in the Offer or (b) the closing market price on the business day next preceding the day the Offer is accepted by the Company. In the event the Company does not purchase the Offered Shares offered by the Investor pursuant to the Offer, and provided that the price specified in the Offer is not greater than the closing market price on the business day next preceding the day of the Offer, the Investor may sell or transfer the Offered Shares at any time within 90 days after the expiration of the Offer for any price. (iii) If the Investor wishes to effect an underwritten offering of the Offered Shares, the Offer shall disclose the number of Offered Shares proposed to be sold to the -12- 13 underwriters. The Company shall have the option to purchase the Offered Shares at the higher of (a) the closing market price on the business day next preceding the day of the Offer or (b) the closing market price on the business day next preceding the day the Offer is accepted by the Company. As soon as practicable after receipt of the Offer, but in no event later than five (5) business days after the Investor makes the Offer, the Company shall have the option to accept the Offer to purchase the Offered Shares. In the event the Company does not purchase the Offered Shares offered by the Investor pursuant to the Offer, the Investor may sell the Offered Shares in an underwritten offering commenced within one hundred twenty (120) days after the expiration of the Offer. (b) Any Offered Shares not sold in accordance with the applicable terms and within the applicable time periods provided in subsection (a) above shall continue to be subject to the requirements of a first offer pursuant to this Section. (c) The provisions of subsections (a) and (b) above shall not apply to any disposition of Restricted Securities in which the aggregate number of such Restricted Securities involved in such disposition is less than two percent (2%) of the aggregate number of Restricted Securities acquired by Investor (or its Affiliates) under this Agreement and the Wholesale Agreement (subject to appropriate adjustment in the event of stock splits, stock dividends, recapitalizations and the like) during any 30-day period. (d) The provisions of subsections (a) and (b) above shall not apply to any disposition of Restricted Securities made in a privately negotiated transaction, whether through broker-dealers who may act as agent or acquire such Restricted Securities as principal, or otherwise, in which: (i) the aggregate number of such Restricted Securities involved in such disposition is less than four percent (4%) of the aggregate number of Restricted Securities acquired by Investor (or its Affiliates) under this Agreement and the Wholesale Agreement (subject to appropriate adjustment in the event of stock splits, stock dividends, recapitalizations and the like); and (ii) no other disposition under this Section 5.1(d) shall have occurred for a period of at least thirty (30) days prior to the applicable disposition; and (iii) such disposition shall not be to an entity a material portion of the business operations of which relates to the pharmaceutical industry, or to an affiliate of such entity or to a third party purchasing on behalf of such entity. The Restricted Securities subject to this Section 5.1(d) shall bear a legend reasonably acceptable to the Company reflecting the restrictions set forth herein. (e) If the Company accepts an Offer under this Section, the closing of such purchase shall occur within ten (10) business days after acceptance of the Offer by the Company. Upon such acceptance, the Company and the Investor shall be legally obligated to consummate the purchase contemplated thereby. -13- 14 (f) The provisions of this Section 5.1 shall lapse and cease to have any effect at such time as the Investor owns Restricted Securities which represent less than three percent (3%) of the outstanding Common Stock of the Company. 5.2 Binding Effect. The Company's right of first offer shall be assignable in whole or in part by the Company, (but only after the Company receives notice of a transfer which is subject to a right of first offer and only with respect to that individual transaction) and shall inure to the benefit of its successors and assigns. The Company's right of first offer shall be binding upon any transferee of any Restricted Securities acquired pursuant to a disposition that is exempt from the right of first offer pursuant to the terms of Section 5.3(i). 5.3 Exempt Transfers. The Company's right of first offer shall not apply to (i) subject to Section 5.2, transfers to controlled Affiliates of Investor provided the transferee agrees to be bound by the obligations of this Agreement, or (ii) transactions involving a merger, reorganization, recapitalization or sale of all or substantially all of the business or capital stock of the Company approved by the Company's board of directors, or (iii) any tender or exchange offer for more than fifty percent (50%) of the Company's outstanding voting stock. 6. Additional Covenants. 6.1 Nasdaq National Market Designation. The Company shall give the Nasdaq National Market timely notice of the issuance of the Shares and shall use all commercially reasonable efforts to maintain the Non-Quantitative Designation Criteria contained in Rule 4460 of the NASD Manual to the extent such criteria are within the control of the Company. 6.2 Reports Under Exchange Act. With a view to making available to the Investor the benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit the Investor to sell the Shares to the public without registration, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144, at all times; (a) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) furnish to the Investor, so long as the Investor owns any Shares, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing the Investor of any rule or regulation of the SEC which permits the selling of any Shares without registration. 7. Miscellaneous. -14- 15 7.1 Survival of Warranties. The warranties, representations and covenants of the Company and Investor contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Investor or the Company. 7.2 Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any of the Shares sold hereunder). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 7.3 Governing Law. This Agreement shall be governed by and construed under the laws of the State of Delaware as applied to agreements among Delaware residents entered into and to be performed entirely within Delaware. 7.4 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 7.5 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 7.6 Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing by personal delivery to the party to be notified or by Federal Express or other overnight package delivery service or by registered or certified mail, postage prepaid and addressed to the party to be notified at the following addresses, or at such other address as such party may designate by five (5) days' advance written notice to the other parties (with notice deemed given upon receipt): If to the Company: Ligand Pharmaceuticals Incorporated 9393 Towne Centre Drive San Diego, California 92121 Attn: William L. Respess, Esq. If to Investor: Eli Lilly and Company -15- 16 Lilly Corporate Center Indianapolis, IN 46285 Attention: General Counsel 7.7 Finder's Fee. Each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. Each party agrees to indemnify and to hold harmless the other party from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the indemnifying party or any of its officers, partners, employees or representatives is responsible. 7.8 Expenses. Irrespective of whether the Closing is effected, each party shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 7.9 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively but only if so expressly stated), only with the written consent of the Company and Investor. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding, each future holder of all such securities, and the Company. 7.10 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provisions were so excluded and shall be enforceable in accordance with its terms. 7.11 Right of Participation in Equity Financings. Subject to the terms and conditions specified in this Section 7.11, the Company hereby grants to Investor a right to purchase up to the number of Additional Shares (as defined below) in connection with any Equity Financing (as defined below) undertaken by the Company. (a) Each time the Company proposes to offer shares of any class of its capital stock (not including any security convertible into a class of capital stock) in a registered public offering ("Equity Financing"), the Company shall deliver a notice in person, by air courier or by facsimile ("Notice") to Investor stating (i) its bona fide intention to undertake such Equity Financing, (ii) the number of shares to be offered in the Equity Financing (the "Equity Financing Shares"), (iii) the number of Additional Shares up to which Investor may elect to purchase in such Equity Financing which would be added to the Equity -16- 17 Financing Shares, and (iv) the price and terms, if any, upon which it proposes to offer such shares in the Equity Financing. (b) Within ten (10) business days after giving the Notice, Investor may elect to purchase, at the price and on the terms specified in the Notice, up to the number of Additional Shares set forth in the Notice. The number of shares of capital stock ("Additional Shares") that Investor may elect to purchase and include in the Equity Financing shall be calculated as follows: Additional Equity Equity Shares = Financing Shares Financing Shares ---------------- ---------------- 1 - X% 1 X% represents the greater of (i) percentage of the outstanding shares of the Company then held by Investor, which shares have been acquired by Investor pursuant to this Agreement and the Wholesale Agreement, or (ii) the percentage of the outstanding shares of the Company held by Investor at the Closing. In the event the number of Equity Financing Shares changes for any reason (other than including the Additional Shares) after the Notice is delivered to Investor, the number of Additional Shares shall be recalculated using the new number of Equity Financing Shares and the Company shall promptly provide a revised Notice to Investor reflecting such change. (c) The right of Investor in this Section 7.11 shall not be applicable (i) to the issuance or sale of shares under any plan, agreement or arrangement, to employees, directors, consultants, customers, vendors, suppliers or other persons or organizations with which the Company has a commercial relationship, provided that such issuances are for other than primarily equity financing purposes, (ii) to the issuance or sale of stock pursuant to Regulation S (or successor rule or regulation) promulgated under the Securities Act, (iii) to the issuance of shares pursuant to the conversion or exercise of convertible or exercisable securities, (iv) to the issuance of shares in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise, (v) to the issuance of shares to a corporation, partnership, educational institution or other entity in connection with a research and development partnership or licensing or other collaborative arrangement between the Company and such institution or entity, or (vi) to the issuance of shares to persons or entities with which the Company has business relationships provided such issuances are for other than primarily equity financing purposes. (d) Notwithstanding anything to the contrary, Investor's right hereunder shall not be applicable, and Investor shall have no right, to the extent that exercising such right should cause Investor (including any Affiliates), to own more than the greater of -17- 18 (i) percentage of the outstanding shares of the Company then held by Investor, which shares have been acquired by Investor pursuant to this Agreement and the Wholesale Agreement, or (ii) the percentage of the outstanding shares of the Company held by Investor at the Closing. (e) Investor's rights and obligations under this Section 7.11 shall not be assignable. (f) The rights of Investor under this Section 7.11 shall terminate on the earlier of (i) the fifth anniversary date of this Agreement or (ii) the consummation of a merger, reorganization, recapitalization, exchange offer or sale of all or substantially all of the assets of the Company by, with or to a third party. 7.12 Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement among the parties and no party shall be liable or bound to any other party regarding the subject matter hereof and thereof in any manner by any warranties, representations, or covenants except as specifically set forth herein or therein. [Remainder of This Page Intentionally Left Blank] -18- 19 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE COMPANY: LIGAND PHARMACEUTICALS INCORPORATED By: /s/ David E. Robinson ------------------------------------- Title: President and Chief Executive Officer ------------------------------------- INVESTOR: ELI LILLY AND COMPANY By: /s/ August Watanabe ------------------------------------- August M. Watanabe Title: Executive Vice President and Chief Scientific Officer [SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT] -19- 20 EXHIBIT A SCHEDULE OF EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES This Schedule of Exceptions is made and given pursuant to Section 2 of the Stock Purchase Agreement (the "Agreement") dated as of November 25, 1997 by and between Ligand Pharmaceuticals Incorporated, a Delaware corporation (the "Company") and Eli Lilly and Company, an Indiana corporation (the "Investor"). The section numbers in this Schedule of Exceptions correspond to the section numbers in the Agreement; however, any information disclosed herein under any section number shall be deemed to be disclosed and incorporated into any other section number under the Agreement where such disclosure would otherwise be appropriate. Any terms defined in the Agreement shall have the same meaning when used in this Schedule of Exceptions as when used in the Agreement unless the context otherwise requires. Nothing herein constitutes an admission of any liability or obligation on the part of the Company nor an admission against the Company's interest. The inclusion of any schedule herein or any exhibit hereto should not be interpreted as indicating that the Company has determined that such an agreement or other matter is necessarily material to the Company. The Investor acknowledges that certain information contained in these schedules may constitute material confidential information relating to the Company which may not be used for any purpose other than that contemplated in the Agreement. Schedule 2.4 -- SEC Reports On September 26, 1997, the Company filed a Registration Statement on Form S-1 (the "Registration Statement") with the Securities and Exchange Commission in connection with the public offering of an indefinite number of shares of Common Stock, par value $.001 per share (the "Shares") of the Company with an aggregate value of $46,410,000. In addition, the Company filed a Schedule 13e-3 with respect to the transaction. All of the Shares will be issued to the stockholders of Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT"), a research and development company formed by the Company with Allergan, Inc. ("Allergan") in December 1994. ALRT's stockholders will receive such Shares in connection with the Company's exercise of its option (the "Stock Purchase Option") to acquire all of the outstanding shares of ALRT Callable Common Stock, $0.001 par value per share (the "Callable Common Stock"). The shares of Callable Common Stock were originally issued pursuant to a subscription offering of rights to purchase units consisting of one share of the Callable Common Stock and two warrants to purchase the Common Stock of the Company. The issuance of the Shares is being registered by the Company on the Registration Statement pursuant to the Company's obligations, as set forth in Article V of ALRT's Amended and Restated Certificate of Incorporation to provide the holders of Callable Common Stock with shares of the Company's Common Stock covered by an effective registration statement upon exercise of the Stock Purchase Option. On September 24, 1997, in connection with the Company and Allergan's exercise of their respective options to purchase Callable Common Stock and assets of ALRT as set forth in the 21 Registration Statement, the Company and ALRT also agreed to restructure the terms and conditions relating to research, development, commercialization and sublicense rights for the ALRT compounds. Pursuant to the restructuring, the Company will receive exclusive, worldwide development, commercialization and sublicense rights to Oral and Topical Panretin (ALRT1057) (currently in pivotal Phase III clinical trials), ALRT1550 (currently in Phase I/IIa clinical trials for oncology applications) and ALRT268 and ALRT 324 (two advanced preclinical RXR selective compounds). Allergan will receive exclusive, worldwide development, commercialization and sublicense rights to ALRT4310, an RAR antagonist being developed for topical application against mucocutaneous toxicity associated with currently marketed retinoids as well as for psoriasis. Allergan will also receive ALRT326 and ALRT4204 (two advanced preclinical RXR selective compounds). In addition, Ligand and Allergan will participate in a lottery for each of the approximately 2,000 retinoid compounds existing in the ART compound library as of the closing date, with each party acquiring exclusive, worldwide development, commercialization and sublicense rights to the compounds which they select. Ligand and Allergan will each receive a royalty based on net sales of products developed from their selected compounds in addition to the other compounds to which they acquire exclusive rights. Ligand will also pay to Allergan a royalty based on net sales of Targretin for uses other than oncology and dermatology indications and will pay a percentage of royalties payable to Ligand with respect to sales of Targretin other than in such indications. In addition to the various agreements reported in the Company's various SEC filings, on or about the Closing, the Company will have entered into (i) that certain Closing Agreement to be effective as of October 19, 1997, by and between the Company and Investor, (ii) the Agreement, (iii) that certain Collaboration Agreement by and between the Company, Investor and ALRT, (iv) that certain Development and Licensing Agreement (Targretin) by and between the Company and Investor, and (v) that certain Option and Wholesale Purchase Agreement by and between the Company and Investor. Schedule 2.13 -- Intellectual Property The Company has licensed its rights under certain patent applications which cover certain pharmaceutical uses of 9-cis-retinoic acid (ALRT1057) to ALRT. The Company has become aware that a United States patent has been issued to, and foreign counterparts have been filed by, Hoffman LaRoche ("LaRoche") which covers pharmaceutical uses of 9-cis-retinoic acid which may conflict with the Company's right under the patent applications licensed to ALRT. The U.S. Patent and Trademark Office ("PTO") has informed the Company that the overlapping claims are patentable to the Company and stated its intention to initiate an interference proceeding to determine whether the Company or LaRoche is entitled to a patent by having been first to invent the common subject matter. The Company cannot be assured of a favorable outcome in the interference proceeding because of factors not known at this time which may impact the outcome. In addition, the interference proceeding may delay the decision of the PTO regarding the Company's application for the Oral and Topical Panretin (ALRT1057) products. While the Company believes that the LaRoche patent does not cover the use of Oral and Topical Panretin (ALRT1057) to treat leukemias such as APL and sarcomas such as KS, or the treatment of skin diseases such as psoriasis, if the Company does not prevail in the interference 22 proceeding, the LaRoche patent might block the Company's use of Oral and Topical Panretin (ALRT1057) in certain cancers, and the Company may not be able to obtain patent protection for the Oral and Topical Panretin (ALRT1057) products. Schedule 2.14 -- Capitalization; Options and Warrants See Schedule 2.4 regarding the issuance of the Shares to the ALRT stockholders. EX-10.171 8 EXHIBIT 10.171 1 EXHIBIT 10.171 AMENDMENT TO OPTION AND WHOLESALE PURCHASE AGREEMENT This Amendment is executed as of the 23rd day of February, 1998 by and between Eli Lilly and Company ("Lilly") and Ligand Pharmaceuticals Incorporated ("Ligand"). Whereas, Lilly and Ligand have entered into an Option and Wholesale Purchase Agreement dated as of November 25, 1997 (the "Agreement"), and Whereas the parties now desire to amend the Agreement to extend the period of time pursuant to which Ligand may exercise the Ligand Option (as defined in the Agreement). Now, therefore, in consideration of the foregoing, the mutual covenants set forth below and other consideration, receipt sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Section 1.1 of the Agreement is hereby amended to read in its entirety as follows: "Until the later of (a) April 27, 1998, or (b) the date which is three (3) business days after the date Ligand delivers to Lilly the notice referred to in Section 1.4 (the "Ligand Option Period"), Ligand shall have the option (the "Ligand Option") to become Lilly's exclusive wholesaler of the Products, subject to the terms and conditions contained in this Agreement. 2. All other terms and conditions of the Agreement shall remain in full force and effect. 3. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one in the same. LIGAND PHARMACEUTICALS INC. ELI LILLY AND COMPANY By: /s/ William L. Respess By: /s/ August M. Watanabe ------------------------------------ ------------------------- Sr. Vice President, August M. Watanabe General Counsel, Government Relations Executive Vice President Science and Technology Date: February 28, 1998 Date: February 28, 1998 ----------------- ----------------- EX-10.172 9 EXHIBIT 10.172 1 EXHIBIT 10.172 AMENDMENT #2 TO OPTION AND WHOLESALE PURCHASE AGREEMENT This Amendment is executed as of the 16th day of March, 1998 by and between Eli Lilly and Company ("Lilly") and Ligand Pharmaceuticals Incorporated ("Ligand"). Whereas, Lilly and Ligand have entered into an Option and Wholesale Purchase Agreement dated as of November 25, 1997, and amended on February 23, 1998 (the "Agreement"), and Whereas the parties now desire to amend the Agreement to extend the period of time pursuant to which Ligand may exercise the Ligand Option (as defined in the Agreement). Now, therefore, in consideration of the foregoing, the mutual covenants set forth below and other consideration, receipt sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Section 1.1 of the Agreement is hereby amended to read in its entirety as follows: "Ligand Option. Until the date that is seven (7) days after the date on which Lilly gives written notice (the "Option Termination Notice") to Ligand of Lilly's desire to terminate the Ligand Option (the "Ligand Option Period"), Ligand shall have the option (the "Ligand Option") to become Lilly's exclusive wholesaler of the Products, subject to the terms and conditions contained in this Agreement. Lilly shall not give the Option Termination Notice prior to April 27, 1998. If Lilly gives the Option Termination Notice prior to May 28, 1998, it will, upon written request made by both Ligand and Seragen and delivered to Lilly within five (5) days of the date of the Option Termination Notice, defer effectiveness of the Option Termination Notice until May 28, 1998, (with the effect that the Ligand Option would expire on June 4, 1998, if not previously exercised). *** *** *** *** *** *** 2. All other terms and conditions of the Agreement shall remain in full force and effect. 3. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one in the same. LIGAND PHARMACEUTICALS INC. ELI LILLY AND COMPANY By: /s/ William L. Respess By: /s/ August M. Watanabe --------------------------- ----------------------------- Sr. Vice President, General August M. Watanabe Counsel, Government Affairs Executive Vice President Science and Technology Date: February 28, 1998 Date: February 28, 1998 ----------------- ----------------- *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. EX-21.1 10 EXHIBIT 21.1 1 EXHIBIT 21.1 Exhibit 21.1 Subsidiaries of the Registrant LIGAND PHARMACEUTICALS, INCORPORATED LIST OF SUBSIDIARIES Jurisdiction of Name Incorporation Glycomed Incorporated California Ligand Pharmaceuticals, (Canada) Incorporated Saskatchewan, Canada Allergan Ligand Retinoid Therapeutics, Inc. Delaware EX-23.1 11 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Form S-3 No. 333-12603 and Form S-8 No. 333-32297 pertaining to the 1992 Stock Option/Stock Issuance Plan and the 1992 Employee Stock Purchase Plan of Ligand Pharmaceuticals Incorporated, as amended, of our report dated January 30, 1998, with respect to the consolidated financial statements of Ligand Pharmaceuticals Incorporated included in Ligand Pharmaceuticals Incorporated's Annual Report (Form 10-K) for the year ended December 31, 1997. ERNST & YOUNG LLP San Diego, California March 27, 1998 EX-27.1 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1997 DEC-31-1997 62,252 24,034 0 0 36 84,094 29,311 14,458 107,422 21,695 51,379 0 0 39 33,937 107,422 418 51,699 242 34,993 37,433 0 8,088 (100,150) 0 (100,150) 0 0 0 (100,150) (3.02) (3.02)
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