UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM SB-2

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Halozyme Therapeutics, Inc.
(Name of small business issuer in its charter)
 
Nevada
(State or Jurisdiction of Incorporation or organization)
2836
(Primary Standard Industrial Classification Code Number)
88-0488686
(I.R.S. Employer Identification Number)


11588 Sorrento Valley Road, Suite 17
San Diego, California 92121
(858) 794-8889
(Address and telephone number of principal executive offices)

David A. Ramsay
11588 Sorrento Valley Road, Suite 17
San Diego, California 92121
(858) 794-8889
(Name, address and telephone number of agent for service)

Copy of all communications to:
Douglas J. Rein, Esq.
Gray Cary Ware & Freidenrich, LLP
4365 Executive Drive, Suite 1100
San Diego, California 92121
(858) 677-1435

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]

CALCULATION OF REGISTRATION FEE
 
Title Of Each
Class of  Securities
To Be Registered
Amount To Be Registered
Proposed Maximum Offering Price Per Unit (1)
Proposed Maximum Aggregate Offering Price (1)
Amount Of Registration Fee
                                            Common Stock (2)
29,508,664
$4.20
$123,936,389
$15,739.92
 
 
  1   
 
 
(1)     Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, as amended (the “Act”), based
                on the closing price for the Registrant’s common stock as reported on the NASDAQ OTC Bulletin Board on April 19, 2004.
 
(2)     Includes up to 10,461,943 shares issuable upon the exercise of outstanding warrants.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.


 
  2  
 
 
The information in this prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and neither the selling stockholders nor we are soliciting offers to buy these securities in any state where the offer or sale is not permitted.
 

SUBJECT TO COMPLETION, DATED_________________, 2004

PROSPECTUS

HALOZYME THERAPEUTICS, INC.

29,508,664 SHARES OF COMMON STOCK



This prospectus relates to the distribution by certain stockholders of Halozyme Therapeutics, Inc. of up to 29,508,664 shares of our common stock which they own, or which they may at a later date acquire upon the exercise of warrants. Halozyme is not selling any shares of common stock in this offering and therefore will not receive any proceeds from this offering. We may receive proceeds from the exercise price of the warrants if they are exercised by the selling stockholders. All costs associated with this registration will be borne by Halozyme.

Halozyme’s common stock is quoted on the OTC Bulletin Board under the symbol “HZYM.” On April 19, 2004 the closing bid price for one share of our common stock was $4.20.

---------------------------------------------

THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER CAREFULLY THE “RISK FACTORS” BEGINNING ON PAGE 6 OF THIS PROSPECTUS BEFORE MAKING A DECISION TO PURCHASE OUR STOCK.

---------------------------------------------

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

---------------------------------------------

The date of this Prospectus is _____________, 2004

 
     
 
 

TABLE OF CONTENTS

 
  Prospectus Summary   5
  Risk Factors   6
  Use of Proceeds   10
  Determination of Offering Price   10
 Dilution   11
  Selling Security Holders  11  
  Plan of Distribution   13  
  Legal Proceedings   14
  Directors, Executive Officers, Promoters and Control Persons   14
  Security Ownership of Certain Beneficial Owners and Management   16
  Description of Securities   17  
  Interest of Named Experts and Counsel   18
  Disclosure of Commission Position on Indemnification for Securities Act Liabilities   18
  Organization Within Last Five Years   18
  Description of Business   18
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   22
  Description of Property   24  
  Certain Relationships and Related Transactions   24
  Market for Common Equity and Related Stockholder Matters   24
  Executive Compensation   25
  Financial Statements   26
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   26
  Additional Information   26
  Indemnification of Directors and Officers   27
  Other Expenses of Issuance and Distribution   27  
  Recent Sales of Unregistered Securities   27
  Exhibits   29
  Undertakings   29
  Signatures   30



 
  4   
 
 
PROSPECTUS SUMMARY

This summary is not complete and does not contain all of the information that you should consider before investing in our common stock. This summary highlights selected information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the more detailed information regarding our company, the risks of purchasing our common stock discussed under “Risk Factors,” and our financial statements and the accompanying notes , before making an investment decision.

Our Business

Effective March 11, 2004, pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of January 28, 2004, among privately held DeliaTroph Pharmaceuticals, Inc., dba Hyalozyme Therapeutics, Inc. (“Halozyme”), Global Yacht Services, Inc. (“Global”) and Hyalozyme Acquisition Corporation (“Merger Sub”), a wholly owned subsidiary of Global, the Merger Sub merged with and into Halozyme, with Halozyme remaining as the surviving corporation (the “Merger”).

Halozyme Therapeutics, Inc. (Halozyme) is a therapeutically driven biopharmaceutical company dedicated to the development and commercialization of recombinant human enzymes for the infertility, ophthalmology, and oncology communities. The company’s broad product portfolio is based on intellectual property covering the family of human enzymes known as hyaluronidases. The company’s lead products offer a safe and pure alternative to existing slaughterhouse-derived extracts that carry risks of animal pathogen contamination and immunogenicity. The commercialization of Halozyme’s highly versatile enzyme technology within proven markets will enable the company to significantly impact the quality of medicine.

The Offering

By means of this prospectus, a number of stockholders of Halozyme are offering to sell up to 19,046,721 shares of common stock which they own, and 10,461,943 shares of common stock which they may at a later date acquire upon the exercise of warrants. In this prospectus, Halozyme refers to these persons as the selling stockholders.

As of March 31, 2004, Halozyme had 39,421,906 shares of common stock issued and outstanding, which includes shares offered by this prospectus. The number of outstanding common stock does not give effect to stock which may be issued pursuant to the exercise and/or conversion of options and/or warrants  previously issued by Halozyme.

We will not receive any proceeds from the sale of common stock offered by the selling stockholders, but we did receive consideration from the selling stockholders at the time they purchased the shares. We may receive proceeds from the exercise price of the warrants if they are exercised by the selling stockholders. We intend to use any proceeds from exercise of the warrants for working capital and general corporate purposes.

The purchase of the securities offered by this prospectus involves a high degree of risk. Risk factors include the lack of revenues and history of loss, and the need for additional capital. See the “Risk Factors” section of this prospectus for additional Risk Factors.

Summary Financial Data

The following table presents summary pro forma financial information for the fiscal year ended December 31, 2003 to illustrate the effects of the acquisition, as if the Merger transaction between Halozyme and Global had occurred at the beginning of 2003. The data was taken from our financial statements appearing elsewhere in this prospectus, and you should read the actual financial statements for a complete presentation of this information.
 
Year Ended
December 31, 2003
Revenue

$

—
Operating Expenses

$

(1,822,672)
Net Loss

$

(2,215,025)
Current Assets

$

503,580
Total Assets

$

 647,247
Current Liabilities

$

373,440
Total Liabilities

$

373,440
Stockholders’ Equity

$

273,807
 
 
  5   
 
 
RISK FACTORS

You should carefully consider each of the following risk factors and all of the other information provided in this prospectus before purchasing our common stock. An investment in our common stock involves a high degree of risk, and should be considered only by persons who can afford the loss of their entire investment. The risks and uncertainties described below are not the only ones we face. There may be additional risks and uncertainties that are not known to us or that we do not consider to be material at this time. If the events described in these risks occur, our business, financial condition and results of operations would likely suffer. Additionally, this prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. This section discusses the risk f actors that might cause those differences. Several of the most significant risks of this offering include:

 

  §

Limited prior operations, history of operating losses and accumulated deficit may affect our ability to survive.
     
 

  §

We have a history of net losses and may continue to have them.
     
 

  §

Need for additional financing may affect our operations and plan of business.
 
Risks Related To Our Business

If we do not receive and maintain regulatory approvals for our product candidates, we will not be able to commercialize our products, which would substantially impair our ability to generate revenues and materially harm our business and financial condition.

None of our product candidates have received regulatory approval from the FDA. Approval from the FDA is necessary to manufacture and market pharmaceutical products in the United States. Many other countries including major European countries and Japan have similar requirements.

The 510(k) and NDA processes are extensive, time-consuming and costly, and there is no guarantee that the FDA will approve 510(k) s or NDAs for any of our product candidates, or that the timing of any such approval will be appropriate for our product launch schedule and other business priorities, which are subject to change.

Clinical testing of pharmaceutical products is also a long, expensive and uncertain process. Even if initial results of preclinical studies or clinical trial results are positive, we may obtain different results in later stages of drug development, including failure to show desired safety and efficacy.

The clinical trials of any of our product candidates could be unsuccessful, which would prevent us from obtaining regulatory approval and commercializing the product. FDA approval can be delayed, limited or not granted for many reasons, including, among others:
 
 

  §

FDA officials may not find a product candidate safe or effective to merit an approval;
     
 

  §

FDA officials may not find that the data from preclinical testing and clinical trials justifies approval, or they may require additional studies that would make it  commercially unattractive to continue pursuit of approval;
     
 

  §

the FDA may not approve our manufacturing processes or facilities, or the processes or facilities of our contract manufacturers or raw material suppliers;
     
 

  §

the FDA may change its approval policies or adopt new regulations; and
     
 

  §

the FDA may approve a product candidate for indications that are narrow or under conditions that place our product at a competitive disadvantage, which may  limit our sales and marketing activities or otherwise adversely impact the commercial potential of a product.
   
If the FDA does not approve our product candidates in a timely fashion on commercially viable terms or we terminate development of any of our product candidates due to difficulties or delays encountered in the regulatory approval process, it will have a material adverse impact on our business and we will be dependent on the development of our other product candidates and/or our ability to successfully acquire other products and technologies.

In addition, we intend to market certain of our products, and perhaps have certain of our products manufactured, in foreign countries. The process of obtaining approvals in foreign countries is subject to delay and failure for similar reasons.

 
  6   
 
 
If our product candidates are approved by the FDA but do not gain market acceptance, our business will suffer because we may not be able to fund future operations.

A number of factors may affect the market acceptance of any of our existing products or any other products we develop or acquire in the future, including, among others:
 
 

  §

the price of our products relative to other therapies for the same or similar treatments;
     
 

  §

the perception by patients, physicians and other members of the health care community of the effectiveness and safety of our products for their prescribed  treatments;
     
 

  §

our ability to fund our sales and marketing efforts;
     
 

  §

the effectiveness of our sales and marketing efforts; and
     
 

  §

the introduction of generic competitors.
   
In addition, our ability to market and promote our products will be restricted to the labels approved by the FDA. If the approved labels are restrictive, our sales and marketing efforts, as well as market acceptance and the commercial potential of our products may be negatively affected.

If our products do not gain market acceptance, we may not be able to fund future operations, including the development or acquisition of new product candidates and/or our sales and marketing efforts for our approved products, which would cause our business to suffer.

If we are unable to sufficiently develop our sales, marketing and distribution capabilities or enter into agreements with third parties to perform these functions, we will not be able to commercialize products.

We are currently in the process of developing our sales, marketing and distribution capabilities. However, our current capabilities in these areas are very limited. In order to commercialize any products successfully, we must internally develop substantial sales, marketing and distribution capabilities, or establish collaborations or other arrangements with third parties to perform these services. We do not have extensive experience in these areas, and we may not be able to establish adequate in-house sales, marketing and distribution capabilities or engage and effectively manage relationships with third parties to perform any or all of such services. To the extent that we enter into co-promotion or other licensing arrangements, our product revenues are likely to be lower than if we directly marketed and sold our products, and any revenues we receive will d epend upon the efforts of third parties, whose efforts may not be successful.

We have not generated any revenue from product sales to date; we have a history of net losses and negative cash flow, and may never achieve or maintain profitability.

We have not generated any revenue from product sales to date and may never generate revenues from product sales in the future. Even if we do achieve significant revenues from product sales, we expect to incur significant operating losses over the next several years. We have never been profitable, and may never become profitable. We may need to raise additional capital during the next twelve months, particularly if we do not obtain FDA approval for any of our products. If we engage in acquisitions of companies, products, or technology in order to execute our business strategy, we may need to raise additional capital. We may be required to raise additional capital in the future through collaborative agreements, private financings, and various other equity or debt financings. If we are required to raise additional capital in the future, there can be no assurance th at the additional financing will be available on favorable terms, or at all.

If we have problems with our sole contract manufacturer, our product development and commercialization efforts for our product candidates could be delayed or stopped.

We have signed an agreement with a contract manufacturing organization to produce bulk recombinant enzyme product for clinical use. Our contract manufacturer will produce the active pharmaceutical ingredient under cGMP’s for commercial scale validation and will provide support for chemistry, manufacturing and controls sections for FDA regulatory filings. We have not established and may not be able to establish arrangements with additional manufacturers for these ingredients or products should the existing supplies become unavailable or in the event that our sole contract manufacturer is unable to adequately perform its responsibilities. Difficulties in our relationship with our manufacturer or delays or interruptions in such manufacturer’s supply of its requirements could limit or stop our ability to provide sufficient quantities of our products, on a timely basis, for clinical trials and, if our products are approved, could limit or stop commercial sales, which would have a material adverse effect on our business and financial condition.

 
  7   
 
 
Our inability to retain key management and scientific personnel could negatively affect our business.

Our success depends on the performance of key management and scientific employees with biotech experience. Given our small staff size and programs currently under development, we depend substantially on our ability to hire, train, retain and motivate high quality personnel, especially our scientists and management team in this field. If we were to lose one or more of our key scientists, then we would likely lose some portion of our institutional knowledge and technical know-how, potentially causing a substantial delay in one or more of our development programs until adequate replacement personnel could be hired and trained.

Our stock price is subject to significant volatility.

Our stock price may be subject to significant volatility. The following factors, in addition to other risks and uncertainties described in this section and elsewhere in this report, may cause the market price of our common stock to fall. We participate in a highly dynamic industry, which often results in significant volatility in the market price of common stock irrespective of company performance. Fluctuations in the price of our common stock may be exacerbated by conditions in the healthcare and technology industry segments or conditions in the financial markets generally.

Recent trading in our stock has been limited, so investors may not be able to sell as much stock as they want at prevailing market prices.

Global finalized its Merger with Halozyme on March 11, 2004. On March 12, 2004, our common stock began trading. Since then, trading volume has been limited. If limited trading in our stock continues, it may be difficult for investors to sell their shares in the public market at any given time at prevailing prices.

Future sales of shares of our common stock, including sales of shares following the registration of shares we issued in our most recent financing, may negatively affect our stock price.

As a result of our recent private financing transaction, the private investors received approximately 19.0 million shares of common stock. The shares of common stock issued in connection with this financing transaction represent approximately 48% of our outstanding common stock. In connection with the financing transaction, we also issued warrants to the private investors that are exercisable for the purchase of up to an aggregate of 10.5 million shares of common stock based upon a purchase price ranging from $0.77 to $1.75 per share. The exercise of these warrants could result in significant dilution to stockholders at the time of exercise.

We intend to file a registration statement on Form SB-2 with the Securities and Exchange Commission covering the shares issued to the private investors and issuable upon conversion of the warrants. In the future, we may issue additional options, warrants or other derivative securities convertible into Halozyme common stock.

Sales of substantial amounts of shares of our common stock, or even the potential for such sales, could lower the market price of our common stock and impair the company’s ability to raise capital through the sale of equity securities.

Risks Related To Our Industry

Compliance with the extensive government regulations to which we are subject is expensive and time consuming, and may result in the delay or cancellation of product sales, introductions or modifications.

Extensive industry regulation has had, and will continue to have, a significant impact on our business. All pharmaceutical companies, including Halozyme, are subject to extensive, complex, costly and evolving regulation by the federal government, principally the FDA and to a lesser extent by the U.S. Drug Enforcement Administration (“DEA”), and foreign and state government agencies. The Federal Food, Drug and Cosmetic Act, the Controlled Substances Act and other domestic and foreign statutes and regulations govern or influence the testing, manufacturing, packing, labeling, storing, record keeping, safety, approval, advertising, promotion, sale and distribution of our products. Under certain of these regulations, Halozyme and its contract suppliers and manufacturers are subject to periodic inspection of its or their respective facilities, procedures and oper ations and/or the testing of products by the FDA, the DEA and other authorities, which conduct periodic inspections to confirm that Halozyme and its contract suppliers and manufacturers are in compliance with all applicable regulations. The FDA also conducts pre-approval and post-approval reviews and plant inspections to determine whether our systems, or its contract suppliers’ and manufacturers’ processes, are in compliance with cGMP and other FDA regulations.

In addition, the FDA imposes a number of complex regulatory requirements on entities that advertise and promote pharmaceuticals, including, but not limited to, standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities, and promotional activities involving the Internet.

 
  8   
 
 
We are dependent on receiving FDA and other governmental approvals prior to manufacturing, marketing and shipping our products. Consequently, there is always a risk that the FDA or other applicable governmental authorities will not approve our products, or will take post-approval action limiting or revoking our ability to sell our products, or that the rate, timing and cost of such approvals will adversely affect our product introduction plans or results of operations.

Our suppliers and sole manufacturer are subject to regulation by the FDA and other agencies, and if they do not meet their commitments, we would have to find substitute suppliers or manufacturers, which could delay the supply of our products to market.

Regulatory requirements applicable to pharmaceutical products make the substitution of suppliers and manufacturers costly and time consuming. We have no internal manufacturing capabilities and are, and expect to be in the future, entirely dependent on contract manufacturers and suppliers for the manufacture of our products and for their active and other ingredients. The disqualification of these suppliers through their failure to comply with regulatory requirements could negatively impact our business because the delays and costs in obtaining and qualifying alternate suppliers (if such alternative suppliers are available, which we cannot assure) could delay clinical trials or otherwise inhibit our ability to bring approved products to market, which would have a material adverse affect on our business and financial condition.

We may be required to initiate or defend against legal proceedings related to intellectual property rights, which may result in substantial expense, delay and/or cessation of the development and commercialization of our products.

We rely on patents to protect our intellectual property rights. The strength of this protection, however, is uncertain. For example, it is not certain that:
 
 

  §

Our patents and pending patent applications cover products and/or technology that we invented first;
     
 

  §

we were the first to file patent applications for these inventions;
     
 

  §

others will not independently develop similar or alternative technologies or duplicate our technologies;
     
 

  §

any of our pending patent applications will result in issued patents; and
     
 

  §

any of our issued patents, or patent pending applications that result in issued patents, will be held valid and infringed in the event the patents are asserted against others.
     
 
We currently own or license several U.S. and foreign patents and also have pending patent applications. There can be no assurance that our existing patents, or any patents issued to us as a result of such applications, will provide a basis for commercially viable products, will provide us with any competitive advantages, or will not face third-party challenges or be the subject of further proceedings limiting their scope or enforceability.

We may become involved in interference proceedings in the U.S. Patent and Trademark Office to determine the priority of our inventions. In addition, costly litigation could be necessary to protect our patent position. We also rely on trademarks to protect the names of our products. These trademarks may be challenged by others. If we enforce our trademarks against third parties, such enforcement proceedings may be expensive. We also rely on trade secrets, unpatented proprietary know-how and continuing technological innovation that we seek to protect with confidentiality agreements with employees, consultants and others with whom we discuss our business. Disputes may arise concerning the ownership of intellectual property or the applicability or enforceability of these agreements, and we might not be able to resolve these disputes in our favor.

In addition to protecting our own intellectual property rights, third parties may assert patent, trademark or copyright infringement or other intellectual property claims against us based on what they believe are their own intellectual property rights. We may be required to pay substantial damages, including but not limited to treble damages, for past infringement if it is ultimately determined that our products infringe a third party’s intellectual property rights. Even if infringement claims against us are without merit, defending a lawsuit takes significant time, may be expensive and may divert management’s attention from other business concerns. Further, we may be stopped from developing, manufacturing or selling our products until we obtain a license from the owner of the relevant technology or other intellectual property rights. If such a license is available at all, it may require us to pay substantial royalties or other fees.

If third-party reimbursement is not available, our products may not be accepted in the market.

Our ability to earn sufficient returns on our products will depend in part on the extent to which reimbursement for our products and related treatments will be available from government health administration authorities, private health insurers, managed care organizations and other healthcare providers.

 
  9   
 
 
Third-party payers are increasingly attempting to limit both the coverage and the level of reimbursement of new drug products to contain costs. Consequently, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. If we succeed in bringing one or more of our product candidates to market, third-party payers may not establish adequate levels of reimbursement for our products, which could limit their market acceptance and result in a material adverse effect on our financial condition.

We face intense competition and rapid technological change that could result in the development of products by others that are superior to the products we are developing.

We have numerous competitors in the United States and abroad, including, among others, major pharmaceutical and specialized biotechnology firms, universities and other research institutions that may be developing competing products. Such competitors may include Sigma-Aldrich Corporation, ISTA Pharmaceuticals, Inc. and Allergan, Inc., among others. These competitors may develop technologies and products that are more effective or less costly than our current or future product candidates or that could render our technologies and product candidates obsolete or noncompetitive. Many of these competitors have substantially more resources and product development, manufacturing and marketing experience and capabilities than we do. In addition, many of our competitors have significantly greater experience than we do in undertaking preclinical testing and clinical trials of pharmaceutical produc t candidates and obtaining FDA and other regulatory approvals of products and therapies for use in healthcare.

We are exposed to product liability claims, and insurance against these claims may not be available to us on reasonable terms or at all.

We might incur substantial liability in connection with clinical trials or the sale of our products. Product liability insurance is expensive and in the future may not be available on commercially acceptable terms, or at all. A successful claim or claims brought against us in excess of our insurance coverage could materially harm our business and financial condition.

Cautionary Statement Regarding Forward-Looking Statements

Some statements in this prospectus contain certain “forward-looking” statements of management of Halozyme. Forward-looking statements are statements that estimate the happening of future events and are not based on historical fact. Forward-looking statements may be identified by the use of forward-looking terminology, such as “may,” “shall,” “could,” “expect,” “estimate,” “anticipate,” “predict,” “probable,” “possible,” “should,” “continue,” or similar terms, variations of those terms or the negative of those terms. The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible t o predict and no representation, guarantee, or warranty is to be inferred from those forward-looking statements.

The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. We cannot guarantee that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-lookin g statements.

USE OF PROCEEDS

We will not receive proceeds from the sale of shares under this prospectus, but we did receive consideration from the selling stockholders at the time they purchased the shares. We may receive proceeds from the exercise price of the warrants if they are exercised by the selling stockholders. Assuming the exercise of all the selling stockholders’ warrants, we would receive gross proceeds of approximately $15,980,817. We intend to use any proceeds from exercise of the warrants for working capital and general corporate purposes.

DETERMINATION OF OFFERING PRICE

The Offering Price is estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, as amended (the “Act”), and is based on the closing price for the Registrant’s common stock as reported on the NASDAQ OTC Bulletin Board on April 19, 2004.

 
  10   
 
 
DILUTION

Halozyme is not selling any common stock in this offering. The selling stockholders are current stockholders of Halozyme. As such, there is no dilution resulting from the common stock to be sold in this offering.

SELLING SECURITY HOLDERS

The securities are being offered by certain selling security holders. The selling security holders may from time to time offer and sell pursuant to this prospectus up to an aggregate of 29,508,664 shares of our common shares now owned by them or issuable to them upon the exercise of warrants. The selling security holders may, from time to time, offer and sell any or all of the shares that are registered under this prospectus. Because the selling security holders are not obligated to sell their shares, and because the selling security holders may also acquire publicly traded shares of our common stock, we cannot estimate how many shares the selling security holders will own after the offering.

Pursuant to the stock purchase agreements with the selling security holders, all expenses incurred with respect to the registration of the common stock will be borne by us, but we will not be obligated to pay any underwriting fees, discounts, commissions or other expenses incurred by them in connection with the sale of such shares.

The following table sets forth, with respect to the selling security holders: (i) the number of shares of common stock beneficially owned as of March 31, 2004 and prior to the offering contemplated hereby, and (ii) the percentage of shares of common stock beneficially owned as of March 31, 2004.
 
 
Stockholders
Number of Shares of Common Stock
Warrants
(Common Stock)
Total Common Stock Equivalents
Ownership % (Outstanding Shares)
Adam K. Stern
40,000
20,000
60,000
0.15%
Anthony Salandra
68,798
61,298
130,096
0.33%
Arianna Sheree Lynch

       2,407

 —

 2,407

 0.01%

Asia Pacific Imports
50,000
25,000
75,000
0.19%
Autry Qualified Interest Trust
200,000
100,000
300,000
0.76%
Baybridge Capital Corp.
512,349
187,425
699,774
1.77%
BioGrowth, Inc.
512,349
187,425
699,774
1.77%
Bonanza Master Fund, LTD
600,000
300,000
900,000
2.27%
Brean Murray and Co. Inc.
50,000
364,284
414,284
1.04%
Cal-Fed Bank Custodian for Jonathan Spanier IRA
474,890
211,570
686,460
1.73%
Cantonal Corporation
300,001
150,000
450,001
1.14%
Centrum Bank AG
200,000
100,000
300,000
0.76%
Cimarron Biomedical Investors
200,000
100,000
300,000
0.76%
Cindy Ullman
5,000
2,500
7,500
0.02%
Colleen Paffie
8,800
—
8,800
0.02%
Curtis Leahy

 405,000

 —

 405,000

1.03%

Darren Blanton
562,788
442,788
1,005,576
2.52%
David Hochman
10,000
5,000
15,000
0.04%
Dr. Donald Cramer
2,500
1,250
3,750
0.01%
Dr. Leonard Makowka
10,000
5,000
15,000
0.04%
Equine Consultants Ltd.
107,500
—
107,500
0.27%
Erietta Papakosta
100,000
50,000
150,000
0.38%
Forest Hill Select Fund, LP
320,000
160,000
480,000
1.21%
Frankln H. Nyi
80,000
40,000
120,000
0.30%
Garfield Associates, LLC
20,000
10,000
30,000
0.08%
Gene Salkind, MD
160,000
80,000
240,000
0.61%
Gibralt Capital Corporation
400,000
200,000
600,000
1.51%
Grant Bettingen, Inc.

 123,703

 —

 123,703

 0.31%

Grove Capital, LLC
35,000
20,000
55,000
0.14%
Harvest International
107,596
107,596
215,192
0.54%
Harvey Anderson
53,798
53,798
107,596
0.27%
 
 
 
 
 
  11   
 
 

Harvey Grossman
8,800
-
8,800
0.02%
Henri Talerman
80,000
40,000
120,000
0.30%
Hyde Family Trust
80,000
40,000
120,000
0.30%
Jacqueline Autry
40,000
20,000
60,000
0.15%
Janelle Noelle Lynch

 2,407

 -

 2,407

 0.01%

Jeffrey Geddes
8,800
-
8,800
0.02%
Jerome Morgan
8,800
4,400
13,200
0.03%
Jesse Grossman
1,231,558
627,219
1,858,777
4.64%
Jesse Grossman Accountancy Corp. Retirement Trust
474,890
211,570
686,460
1.73%
John Paul DeJoria
80,000
40,000
120,000
0.30%
John S. Lemak
80,000
40,000
120,000
0.30%
Jonathan Spanier
1,197,757
655,219
1,852,976
4.62%
Jonathan Spanier Custodian for Esme Spanier under CUTMA, age 21
50,000
-
50,000
0.13%
Keith Granirer
7,500
3,750
11,250
0.03%
Ken Rickel
445,192
330,192
775,384
1.95%
Ken Y. Leung
80,000
40,000
120,000
0.30%
Kerry McVey
107,596
107,596
215,192
0.54%
Kimberly Craig-Woodworth
20,000
10,000
30,000
0.08%
Kingsbridge Capital
150,000
75,000
225,000
0.57%
Laura Stone
8,800
4,400
13,200
0.03%
Lawrence Diamant
3,500
1,750
5,250
0.01%
Lincoln Associates, LLC
20,000
10,000
30,000
0.08%
Linda May Stone
40,000
20,000
60,000
0.15%
Lore E. Stone
24,000
12,000
36,000
0.09%
Louis F. Burke PC Retirement Trust
20,000
10,000
30,000
0.08%
Louis Spanier
25,000
-
25,000
0.06%
Marc Rose
208,000
104,000
312,000
0.79%
Mark Emalfarb Custodian for Ashley Emalfarb
8,000
4,000
12,000
0.03%
Mark Emalfarb Custodian for Hailey Emalfarb
8,000
4,000
12,000
0.03%
Mark Wilson
50,000
-
50,000
0.13%
Matthew Markin
80,000
40,000
120,000
0.30%
Michael P. Marcus
80,000
40,000
120,000
0.30%
Michael Stone
577,394
369,394
946,788
2.38%
Nadine Smith
319,193
209,596
528,789
1.33%
Odyssey Holdings Ltd.
512,349
187,425
699,774
1.77%
Patricia Fox
8,800
-
8,800
0.02%
Paul Geddes
8,800
-
8,800
0.02%
Paul Rosenberg
53,798
53,798
107,596
0.27%
Paula Rubino
8,800
-
8,800
0.02%
Peter Geddes
1,567,451
731,091
2,298,542
5.72%
Peter Geddes Custodian for Avery Geddes under CUTMA, age 21
20,000
-
20,000
0.05%
Peter Geddes Custodian for Campbell Geddes under CUTMA, age 21
50,000
25,000
75,000
0.19%
Peter Geddes Custodian for Lily Geddes under CUTMA, age 21
50,000
25,000
75,000
0.19%
Peter Geddes Custodian for Zachary Geddes under CUTMA, age 21
20,000
-
20,000
0.05%
Peter Graffman
75,000
12,500
87,500
0.22%
Peter Kosa
100,000
50,000
150,000
0.38%
Ram Trading, Ltd.
1,000,000
500,000
1,500,000
3.76%
Richard Genovese
1,242,404
836,394
2,078,798
5.16%
Roth Capital
-
300,000
300,000
0.76%
Sandor Capital Master Fund, L.P.
250,000
125,000
375,000
0.95%
 

 
  12   
 
 

Sandy Geddes

8,800

—

 8,800

0.02%

Sean Fitzpatrick

   25,000

12,500

37,500

                    0.10%

Shai Z. Stern
120,000
60,000
180,000
0.46%
Spectrum Advisors, Ltd.
332,596
157,596
490,192
1.24%
Stephanie Spanier
50,000
—
50,000
0.13%
Steven S. Vender
45,000
22,500
67,500
0.17%
TBG America Inc.
80,000
40,000
120,000
0.30%
The Ward Family Foundation
120,000
60,000
180,000
0.46%
University Finance, Inc.
889,033
725,406
1,614,439
4.02%
Vertical Ventures, LLC
200,000
100,000
300,000
0.76%
Vitel Ventures Corp.
657,426
328,713
986,139
2.48%
Whitney & Clarkia Wilson Trust
50,000
—
50,000
0.13%
William F. Miller III
113,798
30,000
143,798
0.36%
Winnie Huang
40,000
20,000
60,000
0.15%
Sub Total (Issued & Outstanding)
19,046,721
10,461,943
29,508,664
74.15%
Total (Fully Diluted)    
   29,508,664
 


PLAN OF DISTRIBUTION

The selling stockholders and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholders may use any one or more of the following methods when selling shares:
 
 

  §

ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
     
 

  §

block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the  transaction;
     
 

  §

purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
     
 

  §

an exchange distribution in accordance with the rules of the applicable exchange;
     
 

  §

privately negotiated transactions;
     
 

  §

short sales;
     
 

  §

broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;
     
 

  §

a combination of any such methods of sale; and
     
 

  §

any other method permitted pursuant to applicable law.

The selling stockholders may also sell shares under Rule 144 under the Securities Act of 1933, as amended, if available, rather than under this Prospectus. The selling stockholders may also engage in short sales against the box, puts and calls and other transactions in our securities or derivatives of our securities, and may sell or deliver shares in connection with these trades. The selling stockholders may pledge their shares to their brokers under the margin provisions of customer agreements. If a selling stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares.

Broker-dealers engaged by the selling stockholders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The selling stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved.

 
  13   
 
 
The selling stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.

We are required to pay all fees and expenses (excluding selling expenses) incident to the registration of the shares being registered herein, including fees and disbursements of counsel to the selling stockholders. We have agreed to indemnify certain of the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

LEGAL PROCEEDINGS

From time to time, Halozyme may be involved in litigation relating to claims arising out of its operations in the normal course of business. Halozyme currently is not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial position.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

Jonathan E. Lim, MD (32), President & Chief Executive Officer and Chairman of the Board. Dr. Lim joined Halozyme in 2003. From 2001 to 2003, Dr. Lim was a management consultant at McKinsey & Company, where he specialized in the health care industry, serving a wide range of start-ups to Fortune 500 companies in the biopharmaceutical, medical products, and payor/provider segments. From 1999 to 2001, Dr. Lim was a recipient of a National Institutes of Health Postdoctoral Fellowship, during which time he conducted clinical outcomes research at Harvard Medical School. He has published articles in leading peer-reviewed medical journals such as the Annals of Surgery and the Journal of Refractive Surgery. Dr. Lim’s prior experience also includes two years of clinical training i n general surgery at the New York Hospital-Cornell Medical Center and Memorial Sloan-Kettering Cancer Center; Founder and President of a seed-stage health care company; Founding Editor-in-Chief of the McGill Journal of Medicine; and basic science and clinical research at the Salk Institute for Biological Studies and Massachusetts Eye and Ear Infirmary. Dr. Lim is currently a member of the strategic planning committee of the American Medical Association. He earned his BS with honors and MS degrees in molecular biology from Stanford University, his MD degree from McGill University, and his MPH degree in health care management from Harvard University.

Gregory I. Frost, PhD (32), Vice President & Chief Scientific Officer and Director. Dr. Frost joined Halozyme in 1999 and has spent more than ten years researching the hyaluronidase family of enzymes. From 1998 to 1999, he was a Senior Research Scientist at the Sidney Kimmel Cancer Center (SKCC), where he focused much of his work developing the hyaluronidase technology. Prior to SKCC, his research in the Department of Pathology at the University of California, San Francisco, led directly to the purification, cloning, and characterization of the human hyaluronidase gene family, and the discovery of several metabolic disorders. He has authored over 13 scientific peer-reviewed and invited articles in the Hyaluronidase field and is an inventor on numerous patents. Frost’s prior experience includes serving as a scientific consultant to a number of biopharmaceutical companies, including Q-Med (SE), Biophausia AB (SE), and Active Biotech (SE). Dr. Frost is registered to practice before the US Patent Trademark Office, and earned his BA in biochemistry and molecular biology from the University of California, Santa Cruz, and his PhD in the department of Pathology at the University of California, San Francisco, where he was an ARCS-Scholar.

David A. Ramsay, MBA (39), Vice President & Chief Financial Officer. Mr. Ramsay joined Halozyme in 2003 and brings 17 years of corporate financial experience spanning several industries. From 2000 to 2003, he was Vice President, Chief Financial Officer of Lathian Systems, a leading provider of technology-based sales solutions for the life sciences industry. Prior to Lathian, Mr. Ramsay was the Vice President, Treasurer of ICN Pharmaceuticals, a multinational, specialty pharmaceutical company with approximately $800 million in revenue and a market capitalization of $3 billion at the time. Mr. Ramsay joined ICN in 1998 from ARCO, where he spent four years in various financial roles, most recently serving as Manager of Financial Planning & Analysis for the company’s 1,7 00-station West Coast Retail Marketing Network. Prior to ARCO, he served as Vice President, Controller for Security Pacific Asian Bank, a $500 million subsidiary of Security Pacific Corporation. He began his career as a Senior Auditor (CPA) at Deloitte & Touche after graduating from the University of California, Berkeley with a BS degree in Business Administration. Mr. Ramsay earned his MBA degree with a dual major in Finance and Strategic Management from The Wharton School at the University of Pennsylvania.

Don A. Kennard (57), Vice President of Regulatory Affairs & Quality Assurance. Mr. Kennard joined Halozyme in 2004 and brings to Halozyme nearly 30 years of professional senior management experience in the fields of regulatory affairs (RA), clinical programs, and quality assurance (QA). He has worked directly with the U.S. Food and Drug Administration (FDA), as well as regulatory authorities of various foreign ministries of health, to secure registration, authorize commercialization, and successfully implement quality programs, for a broad range and extensive number of product approvals across pharmaceuticals, biologics, medical devices, and diagnostics. Prior to Halozyme, Mr. Kennard was Vice President of Worldwide RA/QA at Quidel, Inc., an $80 million manufacturer of diagnostic products, whe re he led the RA/QA and Clinical functions to increase product approvals by 40% and increase sales volume by 22%, while also establishing a Quality System CE marking program that enabled Quidel to expand and sustain sales in the EU. From 1991 to 2001, he was Vice President of RA/QA/R&D for Nobel Biocare, Inc. and Steri-Oss (acquired by Nobel Biocare), where he directed all regulatory affairs, quality assurance, clinical trials, and R&D activities. From 1981 to 1991, Mr. Kennard was Director of RA/QA at Allergan, Inc., where he directed RA/QA/QC in the development and manufacture of prescription and OTC ophthalmic and dermatological drugs, injectable drugs, biotechnology products (e.g., Botox), and ophthalmic products (e.g., contact lens, intraocular lens). Prior to Allergan, he was Director of Quality Control at B. Braun. Mr. Kennard holds a BS degree in Microbiology and a Regulatory Affairs Certificate.

 
  14   
 
 
Carolyn M. Rynard, PhD (48), Vice President of Product Development & Manufacturing. Dr. Rynard joined Halozyme in 2003. Dr. Rynard’s career in drug development spans 20 years in the pharmaceutical and biotech industries. Her broad experience includes project management, formulation, manufacturing, clinical supplies, validation, medical devices, and drug delivery systems. From 2001 to 2003, Dr. Rynard was Vice President of Product Development at Medinox, Inc., where she was directly responsible for Medinox’s Chemistry, Manufacturing, and Controls (CM&C), formulation, analytical methods, and specification development. From 1994 to 2001, she worked for Amylin Pharmaceuticals, Inc., a San Diego, California-based pharmaceutical company where she held various positions of inc reasing responsibility, serving most recently as Senior Director of Product Development. At Amylin, Dr. Rynard managed seven functional areas and wrote CMC sections for US NDA and INDs; European MAA and CTX regulatory filings; as well as device 510(k) and CE mark technical files. Prior to joining Amylin, Dr. Rynard held various R&D positions at Baxter Healthcare and at Du Pont. Dr. Rynard earned her BSc degree in Chemistry and Biochemistry from the University of Toronto, and her PhD in Physical and Organic Chemistry from Stanford University.

Mark S. Wilson, MBA (43), Vice President of Business Development. Mr. Wilson joined Halozyme in 2003 and has spent more than 15 years in the biotechnology/pharmaceutical industry, having most recently served as Founder and CEO of Biophysica Science, Inc. and Director of Strategic External Alliance Management at Pfizer Global R&D – La Jolla from 2001 to 2003. From 1996 to 2001, Mr. Wilson was Associate Director of Materials at Agouron Pharmaceuticals, Inc., where he identified and negotiated international supply agreements in excess of $120 million annually and served as Materials Manager for the launch of Viracept®. From 1991 to 1996, Mr. Wilson was an Associate Director at Gensia Laboratories, Ltd., where he directed a wide range of business operations. Prior experience al so includes various management and operational roles at Hybritech, Ferro Corporation, and TRW, Inc. Mr. Wilson earned his BS degree in engineering from the University of California, Berkeley, and his MBA degree at the Anderson Graduate School of Management at the University of California, Los Angeles.

Louis H. Bookbinder, PhD (46), Director of Biochemistry. Dr. Bookbinder joined Halozyme in 2002. Dr. Bookbinder has extensive experience in the biotechnology industry, serving as a Consulting Research Scientist to a number of companies, including Molecular Diagnostic Solutions-USA (San Diego, CA), Zygam, Inc. (Vista, CA), Mycoferm Technologies (Bellevue, WA), and Syrrx, Inc. (San Diego, CA), from 2001 to 2002. From 1995 to 2001, he was a Principal Investigator and Senior Staff Scientist at Tera Biotechnology Corporation (San Diego, CA) and Favrille, Inc. (San Diego, CA), a VC funded spin-off of Tera Biotechnology. Dr. Bookbinder’s scientific background includes Senior Research Scientist at the Sidney Kimmel Cancer Center; Research Scientist at the La Jolla Institute for Ex perimental Medicine; Research Fellow at the Scripps Research Institute; and Senior Research Fellow at the University of Washington. He has authored multiple scientific peer-reviewed articles in leading journals such as Science, Journal of Cellular Biology, and FASEB, and is a named inventor on numerous patents. Dr. Bookbinder earned his BA in biology at the University of California, Los Angeles, his MS in zoology at the University of Maine, Orono, and his PhD in biology at the University of California, San Diego.

Edward L. Mercaldo (62), Director. Mr. Mercaldo is a Financial Consultant and private investor, following his successful career as an International Commercial and Investment Banker for several leading companies including Bank of Montreal, Bankers Trust Company of New York, Gordon Capital and First Marathon Securities. Mr. Mercaldo also served as Executive Vice President, Chief Financial Officer and Director of Diamond Fields Resources, Inc., and following the purchase of Diamond Fields by Inco Ltd. in August 1996, he continued as a Director of Inco until September 2000. Mr. Mercaldo has served as a self-employed consultant to numerous companies for the past five years.

John S. Patton, PhD (56), Director. Dr. Patton is co-Founder and Vice President, Research of Nektar Therapeutics (formerly Inhale Therapeutic Systems) and has served as Chief Scientific Officer since November 2001 and as a director since July 1990. He is a world-renowned expert in the delivery of peptides and proteins. Before co-founding Inhale, John led the drug delivery group at Genentech, Inc., where he demonstrated the feasibility of systemic delivery of large molecules through the lungs. Prior to joining Genentech, Inc., he was a tenured professor at the University of Georgia. He has published a wide range of articles and has presented his work in national and international arenas. Dr. Patton received his Ph.D. in Biology from the University of California, San Diego, and held post-d octoral positions in biomedicine at Harvard Medical School and the University of Lund in Sweden. Dr. Patton is both a personal investor in Halozyme and Chairs the Scientific and Clinical Advisory Board.

 
  15   
 
 
Robert Engler (59), Director. Dr. Engler spent his career as a Cardiologist at the Veterans Affairs Medical Center and the University of California, San Diego, where he retired as Professor Emeritus in 2001. While at the VA Center, Dr. Engler served as Associate Chief of Staff and Chief of Research and was an attending physician, in addition to running an active cardiovascular research laboratory. His research and clinical work led to the founding of two successful biotechnology companies: Gensia, Inc., and Collateral Therapeutics, Inc. He also founded and served as President of the Veterans Medical Research Foundation. Dr. Engler graduated from Georgetown Medical School.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial ownership of our common stock by each person or entity known by us to be the beneficial owner of more than 5% of the outstanding shares of common stock, each of our directors and named executive officers, and all of our directors and executive officers as a group as of March 31, 2004.
 
Name of Beneficial Owner
 
Amount of Owner
 
Percent of Class
Gregory Frost (1)
 
3,507,764
 
8.83%
Jonathan Lim (2)
 
1,493,620
 
2.92%
David Ramsay (3)
 
256,410
 
0.65%
Mark Wilson (4)
 
50,000
 
0.13%
Ira Lechner (5)
 
1,152,329
 
2.92%
Edward Mercaldo (6)
 
819,938
 
2.08%
John Patton (7)
 
447,471
 
1.13%
Elliot Feuerstein (8)
 
3,504,373
 
8.86%
Börgstrom Family Trusts (9)
 
2,710,474
 
6.88%
Peter Geddes (10)
 
2,645,376
 
6.60%
Jonathan Spanier (11)
 
2,800,270
 
7.01%
Jesse Grossman (12)
 
2,563,571
 
6.42%
 
 
 
 
All officers and directors as a group (13)
 
7,727,532
 
19.42%
 
 
 
 
 

Beneficial ownership is determined in accordance with the Rule 13d-3(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and generally includes voting or investment power with respect to securities. Except as subject to community property laws, where applicable, the person named above has sole voting and investment power with respect to all shares of Halozyme’s common stock shown as beneficially owned by him.

___________________________________________________________________________________________________________

        
 

(1) 

Includes 2,953,779 shares and warrants to purchase 32,771 shares held in the name of Dr. Frost; and 190,072 shares and warrants to purchase 22,241 shares held in the name of the Frost Family Trust. Also includes 308,901 shares issuable upon exercise of options exercisable within 60 days, of which are held in Dr. Frost’s name.

   

(2)  

Includes 484,497 shares and warrants to purchase 26,690 shares held in the name of Dr. Lim. Also includes 982,433 shares issuable upon exercise of options exercisable within 60 days, of which are held in Dr. Lim’s name.
   

(3)  

Includes 256,410 shares in the name of Mr. Ramsay, which are subject to the Company’s right of repurchase until such shares are vested
   

(4) 

Includes 50,000 shares held in the name of Mr. Wilson.

 
 
  16   
 
 
 
(5) Includes 100,000 shares held in the name of Mr. Ira Lechner; 693,745 shares and warrants to purchase 134,806 shares held in an IRA account for the benefit of Mr. Lechner; 11,465 shares held in the name of Mr. Lechner and Winifred Eileen Haag as community property; and 190,072 shares and warrants to purchase  22,241 shares held in the Ira M. Lechner Charitable Trust.
   

(6) 

Includes 116,415 shares and warrants to purchase 10,529 shares held in the name of Mr. Mercaldo; 123,883 shares held in the name of Karen and Mr. Mercaldo; and 480,145 shares and warrants to purchase 88,966 shares held in the name of the Mercaldo Family Trust.
   
(7)  Includes 83,051 shares held in the name of Dr. Patton; 232,830 shares and warrants to purchase 31,590 shares held in the name of the John and Jamie Patton Trust. Also includes 100,000 shares issuable upon exercise of options exercisable within 60 days, of which are held in Dr. Patton’s name.
   
(8)  Includes 3,256,872 shares and warrants to purchase 120,556 shares held in the name of Mr. Feuerstein; and 116,415 shares and warrants to purchase 10,530  shares held in the name of the Elliot Feuerstein Trust.
   
(9)   Includes 2,426,158 shares held in the name of the Börgstrom Family Trust; 94,772 shares held in the name of Eva Börgstrom for the benefit of Nils Peter  Börgstrom; 94,772 shares held in the name of Bengt Jonas Börgstrom; and 94,772 shares held in the name of Per Henrik Börgstrom.  
   
(10)    Includes 1,705,951 shares and warrants to purchase 731,091 shares, 140,000 shares and warrants to purchase 50,000 shares held in the name of Peter Geddes under custodial accounts for the benefit of minors; and 11,667 shares and warrants to purchase 6,667 shares held in the name of Grove Capital, LLC in which Peter Geddes is a member. Peter Geddes may be deemed a beneficial owner of the shares held in the name of Grove Capital, LLC; however, he disclaims beneficial ownership except to the extent of his pecuniary interest therein
   
(11)  Includes 1,390,257 shares and warrants to purchase 655,219 shares; 474,890 shares and warrants to purchase 211,570 shares held in the name of the Jonathan  Spanier IRA Account; 50,000 shares held in the name of Jonathan Spanier under a custodial account for the benefit of a minor; and 11,667 shares and warrants to  purchase 6,667 shares held in the name of Grove Capital, LLC in which Jonathan Spanier and the Jonathan Spanier IRA Account are members. Each of Jonathan   Spanier and the Jonathan Spanier IRA Account may be deemed beneficial owners of the shares held in the name of Grove Capital, LLC; however, each disclaims  beneficial ownership except to the extent of their pecuniary interest therein.
   
(12)  Includes 1,231,558 shares and warrants to purchase 627,219 shares; 474,890 shares and warrants to purchase 211,570 shares held by the Jesse Grossman  Accountancy Corporation Retirement Trust; and 11,667 shares and warrants to purchase 6,667 shares held in the name of Grove Capital, LLC in which Jesse  Grossman and the Jesse Grossman Accountancy Corporation Retirement Trust are members. Each of Jesse Grossman and the Jesse Grossman Accountancy  Corporation Retirement Trust may be deemed beneficial owners of the shares held in the name of Grove Capital, LLC; however, each disclaims beneficial  ownership except to the extent of their pecuniary interest therein.
   
(13)       See Notes 1, 2, 3, 4, 5, 6 and 7. Includes 1,391,334 shares issuable upon exercise of options exercisable within 60 days.

 
 
DESCRIPTION OF SECURITIES

Pursuant to Halozyme’s Articles of Incorporation, as amended, we are authorized to issue 100,000,000 shares of common stock, par value $0.001 per share and 20,000,000 shares of preferred stock, par value $0.001 per share. Below is a description of Halozyme’s outstanding shares of common stock, which are being offered in this prospectus.

Each stockholder of our common stock is entitled to a pro rata share of cash distributions made to stockholders, including dividend payments. The holders of our common stock are entitled to one vote for each share of record on all matters to be voted on by stockholders. There is no cumulative voting with respect to the election of our directors or any other matter. Therefore, the holders of more than 50% of the shares voted for the election of those directors can elect all of the directors. The holders of our common stock are entitled to receive dividends when, as and if declared by our Board of Directors from funds legally available therefore. Cash dividends are at the sole discretion of our Board of Directors. In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining available for d istribution to them after payment of our liabilities and after provision has been made for each class of stock, if any, having any preference in relation to our common stock. Holders of shares of our common stock have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to our common stock. As of March 31, 2004, there were approximately 125 record holders of common stock and 39,421,906 outstanding shares of common stock.

 
  17   
 
 
Dividend Policy. We have never declared or paid a cash dividend on our capital stock. We do not expect to pay cash dividends on our common stock in the foreseeable future. We currently intend to retain our earnings, if any, for use in our business. Any dividends declared in the future will be at the discretion of our board of directors and subject to any restrictions that may be imposed by our lenders.

Transfer Agent. The Corporate Stock Transfer Company acts as our transfer agent and registrar.

INTEREST OF NAMED EXPERTS AND COUNSEL

No expert or counsel named in this prospectus, as having prepared or certified any part of this prospectus or having given an opinion upon the validity of the securities being registered or upon other legal matters in connection with the registration or offering of the common stock, was hired on a contingent basis, will receive a direct or indirect interest in Halozyme or any of its subsidiaries or was a promoter, underwriter, voting trustee, director, officer, or employee of Halozyme.

Cacciamatta Accountancy Corporation, independent auditors, have audited our financial statements as of and for the years ended December 31, 2003 and 2002, as set forth in their report and included in this prospectus. The financial statements are included in reliance on such reports given upon the authority of Cacciamatta Accountancy Corporation as experts in accounting and auditing.

The validity of the issuance of the shares of common stock offered hereby and certain other legal matters in connection herewith have been passed upon for us by Gray Cary Ware & Freidenrich LLP ("Gray Cary") . Gray Cary owns a warrant to purchase 39,488 shares of our common stock, which is not being registered as part of this registration statement. 
 
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

Our directors and officers are indemnified by the Bylaws and the Articles of Incorporation of Halozyme to the fullest extent permitted by the Nevada Revised Statutes. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the “Securities Act”), may be permitted to such directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

In the event that a claim for indemnification against such liabilities (other than the payment by Halozyme of expenses incurred or paid by such director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, Halozyme will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

ORGANIZATION WITHIN LAST FIVE YEARS

Halozyme Therapeutics, Inc. is a Nevada corporation, which was originally formed on February 21, 2001 under the name Global Yacht Services, Inc. Effective March 11, 2004, Global Yacht Services, Inc. (“Global”) merged with DeliaTroph Pharmaceuticals, Inc., dba Hyalozyme Therapeutics, Inc. (“Halozyme”), a privately held corporation based in San Diego, California. The Merger was accomplished by forming a wholly owned subsidiary that merged with and into Halozyme, with Halozyme remaining as the surviving corporation (the “Merger”).

DESCRIPTION OF BUSINESS

Our Business Development.

We were incorporated in Nevada on February 21, 2001.

Effective March 11, 2004, pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of January 28, 2004, among privately held DeliaTroph Pharmaceuticals, Inc. dba Hyalozyme Therapeutics, Inc. (“Halozyme”), Global Yacht Services, Inc. (“Global”) and Hyalozyme Acquisition Corporation (“Merger Sub”), a wholly owned subsidiary of Global, the Merger Sub merged with and into Halozyme, with Halozyme remaining as the surviving corporation (the “Merger”).

 
  18   
 
 
Although Global acquired Halozyme as a result of the Merger, the stockholders of Halozyme hold a majority of the voting interest in the combined enterprise. Additionally, the Merger resulted in Halozyme’s management and Board of Directors assuming operational control of Global.
 
The following lists a summary of the structure of the Merger and matters completed in connection therewith:
 
 

  §

On January 28, 2004, pursuant to an investment round completed simultaneously with the signing of the Merger Agreement, Halozyme raised equity capital of  approximately $8.1 million.
     
 

 § 

Our stockholders amended and restated Global’s Articles of Incorporation to change Global’s corporate name to Halozyme Therapeutics, Inc., increased the  authorized number of shares of common stock to 100 million, and authorized 20 million shares of preferred stock.
     
 

§

Global issued 34,999,701 shares of its restricted common stock, 6,886,807 options and 11,758,460 warrants to purchase shares of its common stock to the  stockholders of Halozyme in exchange for 100% of their issued and outstanding common stock, options and warrants to purchase Halozyme’s common stock
     
 

  §

A total of 4,296,362 shares of Global’s outstanding common stock were redeemed by Global from three stockholders in exchange for $42,303, or approximately $0.01 per share.
     
 

  §

Global’s stockholders own approximately 10% of the issued and outstanding shares of Halozyme’s common stock, based on 38,899,701 shares outstanding after the Merger.
 
The full text of the Merger Agreement may be found at Exhibit A to Global’s definitive Schedule 14C Information Statement, as filed with the Securities and Exchange Commission on February 17, 2004.

Our Business prior to the Merger.

Our 2003 revenues have been derived from our yacht rentals and charters as well as management services, which include providing routine maintenance, repairs and electronics installation to our customers’ yachts. Regular maintenance includes services such as exterior and interior cleaning, bottom cleaning, waxing, and zinc replacement.

Our Business following the Merger.

General

Halozyme Therapeutics, Inc. (“We”, “Halozyme” or the “Company”) was founded on February 26, 1998. We are a product-focused biotechnology company dedicated to the development and commercialization of recombinant therapeutic enzymes and drug enhancement systems, based on intellectual property covering the family of human enzymes known as hyaluronidases. Our first products are human synthetic formulations of a hyaluronidase enzyme that replace current animal slaughterhouse-derived enzymes that carry high risks of animal pathogen contamination and immunogenicity. These products are based on a highly versatile enzyme technology that has a wide range of therapeutic applications, and will enable our company to help patients across multiple disease states.

Technology

Our technology is based on recombinant human PH20 (rHuPH20), a human synthetic hyaluronidase that degrades hyaluronic acid (HA), a space-filling “cement”-like substance that is a major component of tissues throughout the body, such as skin and cartilage. The PH20 enzyme is a naturally occurring enzyme that digests HA to break down the cement, thereby facilitating the penetration and diffusion of other drugs that are injected in the skin or in the muscle.

The successes of replacing animal product derived drugs with human recombinant biologics are well documented, as in the case of insulin, Pulmozyme and human growth hormone. Halozyme is executing this recombinant human enzyme replacement strategy by leveraging the safety and efficacy of its products to access key markets in multiple therapeutic areas, beginning with in-vitro fertilization (IVF) and ophthalmology.

Our proprietary technology will both expand existing markets and create new ones. Gaps in existing hyaluronidase offerings may create demand for our solution, and provide opportunities to capture market share. Despite the many potential therapeutic applications for hyaluronidase, there are many problems with existing and potential non-human product offerings, creating the need for alternative solutions.
 

 
 
  19   
 
 
 
 

  §

Prion disease: All such commercial enzyme preparations are crude extracts from cattle testes and are typically less than 1-5% pure. Cattle testes are an organ with the highest concentration of hyaluronidase, but also with the highest levels of a protein implicated in the development of neurodegenerative disorders associated with prion disease, such as “Mad Cow Disease”.
     
 

  §

Immunogenicity: Hyaluronidases can also be found in bacteria, leeches, certain venoms, and marine organisms. Very few companies are pursuing clinical development of any of these enzymes. Regardless, all such preparations are non-human, and are therefore likely to elicit potent immune reactions, possess  endotoxin, or have some of the same defects as slaughterhouse derivations.

 
Strategy

We are pursuing a recombinant human enzyme replacement strategy to pursue a number of attractive near-term market opportunities that can generate early cash flows that can then be leveraged into a number of attractive long-term market opportunities. We intend to leverage the early cash flows to develop the most promising long-term growth opportunities internally en route to building a company of lasting value.

Product Development Programs

We have six product candidates targeting multiple indications in various stages of development. The following table summarizes the lead clinical product and pipeline candidates:
 
Product
Indication
Development Status
Cumulase™
In-vitro fertilization
Pre-510(k)
Enhanze™ SC
Spreading factor for anesthesia
Pre-NDA
Chemophase™
Chemoadjuvant for solid tumors
Pre-clinical
HTI-101
Inflammation, lysosomal storage disorders
Discovery
HTI-201
Inflammation, Oncology
Discovery
HTI-401
Central nervous system trauma and disorders, wound healing
Discovery

 
Cumulase ™
Cumulase™ is an ex vivo formulation of rHuPH20 to replace the bovine enzyme currently used for the preparation of oocytes prior to IVF during the process of ICSI (intracytoplasmic sperm injection), in which the enzyme is an essential component. The U.S. Food and Drug Administration (FDA) considers hyaluronidase IVF products to be medical devices subject to 510(k) approval, presenting a unique opportunity to bring rHuPH20 technology to market in late 2004. The total Cumulase™ market consists of an estimated 500,000 intracytoplasmic sperm injection cycles worldwide in 2004.

Enhanze ™ SC
Enhanze™ SC is a low unit, fast-acting local formulation of rHuPH20 to replace Wydase®, Wyeth’s discontinued bovine enzyme previously used for over 50 years as a drug delivery agent to enhance dispersion of local anesthesia for ophthalmic surgery, particularly in cataract surgery. Halozyme plans to submit a New Drug Application (NDA) in the first quarter of 2005. The market consists of approximately 6.4 million local anesthesia procedures (or 45% of the 14.2 million total estimated cataract surgery procedures) worldwide in 2004. This NDA may facilitate approval for multiple additional indications, including other types of surgery requiring local anesthesia, such as cosmetic surgery.

Enhanze™ SC also facilitates the penetration and dispersion of other drugs by temporarily opening flow channels under the skin. Molecules as large as 200 nanometers may pass freely through the perforated extracellular matrix which recovers its normal density within 24 hours, leading to a drug delivery platform which does not permanently alter the architecture of the skin. Halozyme is actively seeking partnerships with multiple pharmaceutical companies that market drugs requiring injection via the subcutaneous or intramuscular routes that could benefit from this technology. We will use Enhanze™ SC to tap into the large and rapidly growing implantable/injectable segment of the advanced drug delivery technologies market, which is expected to exceed $7 billion in revenues by 2005 (as reported by Kalorama Information, 2002).

Local anesthesia and other small molecule drugs: A natural extension of Enhanze™ SC would be applying this technology, used as a spreading factor for local anesthetics around the eye, to other areas of the body. For example, lidocaine and bupivacaine are administered for most minor surgical operations requiring local anesthesia. This technology would not only speed up the anesthetic process, but may also enable clinicians to use lower volumes of anesthesia to effect adequate pain control.

 
  20   
 
 
Subcutaneous Fluid Replacement (SFR): Our Enhanze™ SC facilitates a procedure known as hypodermoclysis, which allows subcutaneous delivery of fluids up to 1 liter without the need for intravenous access. Importantly, fluid replacement in terminal patients may be achieved without the need for nursing assistance. This is an approved indication of Wydase®. Over 1.1 million SFR infusions are performed per year with hospice patients alone. However, over 500 million infusion bags are utilized annually in the United States alone, many of which could potentially convert to SFR using Enhanze™ Technology, creating a significant potential market opportunity.

Chemophase ™
Enhanze™ Technology may also be utilized in a high unit, intravenous or local formulation to deliver chemotherapy to previously chemorefractory tumors in patients with brain, breast, head and neck, colon, lung, and other malignancies that accumulate hyaluronic acid. Bovine material has shown activity in clinical trials with pediatric brain tumors. We have a material transfer agreement with the research group that ran these trials. The market for cancer biologics, such as Herceptin for breast cancer and Rituxan for Non-Hodgkin’s Lymphoma was approximately $8 billion in 2000, and is expected to grow to nearly $20 billion by 2005 (as reported by McKinsey in 2002). Cytostatic agents alone are expected to reach $4 billion in sales by 2004 (as reported by Lehman Brothers in 2001), and we intends to develop a drug in the next five years through co-a dministration prior to chemotherapeutic regimens for treatment of solid tumors.

HTI-101
Our HTI-101 discovery program is focused on the development of new clinical applications for our second patented enzyme. We are leveraging our knowledge of this family of enzymes to develop new indications for HTI-101 in the fields of inflammation and lysosomal storage diseases.

HTI-201
We have a patented discovery program surrounding another enzyme for use in inflammation and oncology. We are leveraging our recombinant protein expression capacity to develop this technology.

HTI-401
HTI-401 is a fourth patented enzyme in our portfolio that has unique substrate specificity. We are developing manufacturing systems for HTI-401 to explore its use in CNS trauma and wound healing.

Collaborations

We have collaborations underway using our recombinant hyaluronidase technology for gene therapy delivery, central nervous system trauma, and for solid tumor chemosensitization. These programs are collaborative research programs supplying recombinant enzyme with partners that have expertise in relevant pre-clinical models or have drugs that may benefit from our Enhanze™ Technology programs.

Hyaluronidases also have many properties that enable them to be used as therapeutic agents. We are establishing corporate partners to pursue both near-term, recombinant human enzyme replacement as well as longer-term strategies to build a robust pipeline.

Sales and Marketing

Cumulase ™
Our sales and marketing strategy in the IVF market will consist of a multi-channel approach that targets patients, clinicians, suppliers, and regulators. We will raise public awareness of the current risk of using animal-derived products in IVF applications among industry professionals and the general public through direct contact with target audiences, advertising in trade journals, presentations and booths at conferences and trade shows, mass mailings, Web initiatives, and brand-building efforts such as press releases and other public relations efforts. Direct contact could include communicating with key advocacy groups, meeting with FDA officials, and attending specialty conferences.

One of the highest impact target audiences will be the Society for Assisted Reproductive Technology (SART), which is the leading organization of professionals dedicated to the practice of assisted reproductive technologies in the United States. The organization includes over 370 members, which represents over 95% of the ART clinics in the nation. Halozyme will use efficacy and safety data to recruit key thought leaders and practitioners from this organization to help promote the use of Cumulase™ over existing preparations.

There are approximately eight known suppliers of IVF reagents and media, including micromanipulation media that contain hyaluronidase preparations. All of these suppliers sell animal-derived enzymes, and would benefit greatly from having the opportunity to supply clinics with a human recombinant hyaluronidase. We are seeking to establish non-exclusive distribution agreements with a subset of these suppliers to serve the worldwide marketplace. As of April 19, 2004, we have signed three such worldwide distribution agreements with key suppliers serving this market. The agreements are with MediCult AS, a Denmark-based distributor with strengths in the European market, MidAtlantic Diagnostics, Inc., a New Jersey-based distributor with strengths in the North American market, and Cook Ob/Gyn Incorporated, an Indiana-based distributor with strengths in the worldwide market.

 
  21   
 
 
Enhanze ™ SC
We are in various stages of discussions with potential sales and marketing partners that include large, diversified medical products and pharmaceutical companies, as well as focused global ophthalmics companies to help market and sell Enhanze™ SC.

Competition

Cumulase™
A strong clinical selling point for Cumulase™ is that it eliminates the risk of animal pathogens and toxicity inherent in slaughterhouse preparations. The competing enzymes are of animal origin, creating an opportunity for Halozyme to enter the market with a recombinant human enzyme replacement. The leading IVF suppliers are CooperSurgical, Irvine Scientific, MidAtlantic Diagnostics, and Cook Ob/Gyn (bovine products) in the US, and MediCult (ovine) and Vitrolife (bovine) outside the US.

Enhanze ™ SC
Some commercial pharmacies now compound hyaluronidase preparations for institutions and physicians. As no pharmacologic alternatives to hyaluronidase are available, some institutions have pursued this avenue. However, there are several concerns with using an extemporaneously compounded sterile product. Compounded preparations are not FDA-approved products. Some compounding pharmacies do not test every batch of product for drug concentration, sterility, and lack of pyrogens. The American Academy of Ophthalmology therefore recommends that compounded ophthalmic products be used within 30 days of preparation to minimize bacterial overgrowth and drug decomposition. Another manufacturer is developing ovine derived hyaluronidase for intraocular use (Vitrase™), and is also being tested for peribulbar block.

Patents and Proprietary Rights

Our intellectual property portfolio includes six recently issued and four pending composition of matter and utility patents encompassing all four of the clinically relevant human hyaluronidase enzymes. Our patent position surrounding recombinant human hyaluronidases and their methods of manufacture is a key barrier to entry. Patent protection from pending applications would extend the life of our intellectual property estate through 2024.

Development and Manufacturing

We have signed an agreement with a contract manufacturing organization to produce bulk recombinant enzyme product for clinical use. Our contract manufacturer will produce the active pharmaceutical ingredient under cGMP’s for commercial scale validation and will provide support for chemistry, manufacturing and controls sections for FDA regulatory filings. We have not established and may not be able to establish arrangements with additional manufacturers for these ingredients or products should the existing supplies become unavailable or in the event that its sole contract manufacturer is unable to adequately perform its responsibilities. Difficulties in our relationship with our manufacturer or delays or interruptions in such manufacturer’s supply of its requirements could limit or stop its ability to provide sufficient quantities of our products, on a timel y basis, for clinical trials and, if our products are approved, could limit or stop commercial sales, which would have a material adverse effect on our business and financial condition.

Employees

At April 19, 2004, we employed 14 full-time employees. Nine of our employees are involved in research and clinical development activities. Five employees hold Ph.D. or M.D. degrees. We anticipate hiring five to ten additional employees by the end of 2004.

MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION

Liquidity and Capital Resources. Global had cash and total assets of $47,517 as at December 31, 2003. As previously discussed in the Prospectus Summary section, Global consummated its merger with Halozyme on March 11, 2004. On that date, Halozyme had cash and cash equivalents of approximately $7.6 million. We believe that Halozyme’s current available cash is sufficient to fund operations for the balance of 2004.

Global’s current liabilities were $37,453 as at December 31, 2003, and were represented by accounts payable and accrued expenses. Global had no other liabilities and no long term commitments or contingencies as at December 31, 2003.

 
  22   
 
 
Global’s Results of Operations.

Revenue. For the year ended December 31, 2003, Global realized revenues of $25,705 compared to $87,769 for the year ended December 31, 2002. Cost of revenues for the year ended December 31, 2003 was $27,003 compared to $74,674 for the year ended December 31, 2002. Gross profit for the year ended December 31, 2003 was negative $1,298, compared to $13,095 for the year ended December 31, 2002. Because Global decreased the scope and volume of its operations and was preparing for its Merger with Halozyme, Global had lower revenues, costs of revenues and gross profit for the year ended December 31, 2003 compared to the year ended December 31, 2002.

Operating Expenses. For the year ended December 31, 2003, Global had total operating expenses of $77,793 compared to $78,358 for the year ended December 31, 2002. For the year ended December 31, 2003, the majority of those expenses were represented by legal and professional fees of $59,860 as Global incurred significant legal expenses to prepare for the merger with Halozyme. For the year ended December 31, 2003, net loss was $79,091 compared to $65,263 for the year ended December 31, 2002.

Halozyme’s Results of Operations.

Revenue. Halozyme has generated no revenues since its inception on February 26, 1998.

Operating Expenses. For the year ended December 31, 2003, Halozyme had total operating expenses of $1.7 million compared to $1.2 million for the year ended December 31, 2002, an increase of approximately $0.5 million. The majority of this increase was due to an increase of $0.3 million in research and development expenses resulting primarily from increased personnel, facilities costs, and the use of outside services as the Company increased its research and development efforts. The remaining increase of $0.2 million in general and administrative expenses was due to increased personnel and related expenses. For the year ended December 31, 2003, other expenses increased $0.4 million compared to the year ended December 31, 2002. This increase was primarily due to interest expense on notes payabl e and interest expense due to the beneficial conversion feature of shares issued in 2003. For the year ended December 31, 2003, net loss was $2.1 million compared to $1.1 million for the year ended December 31, 2003.

Halozyme’s Plan of Operation for the Next Twelve Months. As previously mentioned, Global merged with Halozyme on March 11, 2004. The old business of Global has ceased to operate. Global’s board and management have resigned and Halozyme’s board and management have assumed operational control of the new entity. In management’s opinion, to achieve our business plan in the next twelve months, Halozyme will strive to attain the following milestones:

Halozyme plans to secure non-exclusive distribution agreements for our Cumulase™ product to serve the worldwide marketplace. As of April 19, 2004, we have signed three such worldwide distribution agreements with key suppliers serving this market. The agreements are with MediCult AS, a Denmark-based distributor with strengths in the European market, MidAtlantic Diagnostics, Inc., a New Jersey-based distributor with strengths in the North American market, and Cook Ob/Gyn Incorporated, an Indiana-based distributor with strengths in the worldwide market. Halozyme plans on filing a 510(k) application in the fourth quarter of this year. If the company receives FDA clearance, the company could launch this product by the end of 2004.
 
Halozyme is currently in discussions with potential sales and marketing partners for its Enhanze™ SC product. Halozyme plans on filing an NDA in the first quarter of 2005 for this product. Currently, Halozyme envisions that such a partnership may allow the company to retain all the intellectual property, clinical development and manufacturing rights, while the partner would contribute sales and marketing efforts to sell the product in selected markets.

On March 11, 2004, Global Yacht Services, Inc. merged with DeliaTroph Pharmaceuticals, Inc., dba Halozyme Therapeutics, Inc. Additionally, on March 11, 2004, Global Yacht Services, Inc. changed its name to Halozyme Therapeutics, Inc. The old business of Global Yacht Services has ceased to operate and we have adopted the business plan of Halozyme Therapeutics, Inc. On the Merger date, DeliaTroph Pharmaceuticals, Inc. had approximately $7.6 million in cash and cash equivalents.

After giving effect to the Merger, substantial additional capital will be required to implement Halozyme’s business plan. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution and such securities may have rights, preferences and privileges senior to those of our common stock. There can be no assurance that additional financing will be available on terms favorable to Halozyme or at all. If adequate funds are not available or are not available on acceptable terms, Halozyme may not be able to fund expansion, take advantage of unanticipated acquisition opportunities, develop or enhance services or products or respond to competitive pressures. Such inability could harm its business, results of operations and financial c ondition.

Off-Balance Sheet Arrangements. We do not have any off-balance sheet arrangements.


 
  23   
 
 
DESCRIPTION OF PROPERTY

Our administrative offices and research facilities are located in San Diego, California. We lease approximately 5,700 square feet of office space for approximately $11,500 per month. The lease term expires on June 30, 2005. We believe the space is adequate for our immediate needs. Additional space may be required as we expand our research and development activities. We do not foresee any significant difficulties in obtaining any required additional facilities.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mitch Keeler, our former president and director prior to the Merger with Halozyme, provided office space to us for operations at no charge. Our financial statements for the years ended 2003 and 2002 reflect the fair market value of such office space as occupancy costs, which is approximately $195 per month. The amount of occupancy costs has been included in the financial statements as an additional capital contribution by Mr. Keeler. Additionally, Mr. Keeler owns a yacht which was used for our charter services prior to the Merger with Halozyme. Mr. Keeler did not expect to be paid or reimbursed for providing the use of his yacht and for providing the office facilities, nor has he demanded such reimbursement.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

Halozyme’s common stock is quoted on the OTC Bulletin Board under the symbol “HZYM.” Our common stock has been traded on the OTC Bulletin Board since March 12, 2004. Prior to that date, our common stock was not actively traded in the public market and it traded under the symbol “GYHT” representing Global Yacht Services, Inc. For the periods indicated, the following table sets forth the high and low bid prices per share of common stock. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.


Fiscal Year 2004
High Bid
Low Bid
First Quarter
$4.75
$0.02

Fiscal Year 2003
High Bid
Low Bid
First Quarter
n/a
n/a
Second Quarter
$0.12
$0.05
Third Quarter
$0.10
$0.05
Fourth Quarter
$0.10
$0.02

Fiscal Year 2002
High Bid
Low Bid
First Quarter
n/a
n/a
Second Quarter
n/a
n/a
Third Quarter
n/a
n/a
Fourth Quarter
n/a
n/a

Trades of our common stock are subject to Rule 15g-9 of the Securities and Exchange Commission, which rule imposes certain requirements on broker/dealers who sell securities subject to the rule to persons other than established customers and accredited investors. For transactions covered by the rule, brokers/dealers must make a special suitability determination for purchasers of the securities and receive the purchaser’s written agreement to the transaction prior to sale. The Securities and Exchange Commission also has rules that regulate broker/dealer practices in connection with transactions in “penny stocks”. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in that security is provided by the exchange or system). The penny stock rules require a broker/ dealer, prior to a transaction in a pennystock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the Commission that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker/dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker/dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker/dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. These disclosure requirements have the effect of reducin the level of trading activity in the secondary market for our common stock. As a result of these rules, investors may find it difficult to sell their shares.
 

 
 
  24   
 
 
Holders

As of March 31, 2004, there were approximately 125 record owners of Halozyme’s common stock.

Dividends

We have never paid cash dividends and have no plans to do so in the foreseeable future. Our future dividend policy will be determined by our Board of Directors and will depend upon a number of factors, including our financial condition and performance, our cash needs and expansion plans, income tax consequences, and the restrictions that applicable laws and our credit arrangements then impose.

EXECUTIVE COMPENSATION

The following table summarizes the annual compensation paid to Halozyme’s named executive officers for the two years ended December 31, 2003 and 2002:
 
 
 
 
Annual Comp
Salary
Long-Term Compensation Awards – Securities Underlying
Stock Options
Name and Position
Year
Jonathan Lim, President, CEO, Director (1)
2003
66,667
2,471,201
Gregory Frost, VP, CSO, Director (2)
2003
92,500
1,235,601
 
2002
43,333
—
David Ramsay, VP, CFO, Secretary (3)
2003
12,240
741,360
Mark Wilson, VP (4)
2003
36,674
494,240
Carolyn Rynard, VP (5)
2003
17,660
494,240


(1)     Dr. Lim joined Halozyme in May, 2003. His annualized salary for 2003 was $100,000.
(2)     Dr. Frost joined Halozyme in March, 1999.
(3)     Mr. Ramsay joined Halozyme in November, 2003. His annualized salary for 2003 was $95,000.
(4)     Mr. Wilson joined Halozyme in June, 2003. His annualized salary for 2003 was $95,000.
(5)     Ms. Rynard joined Halozyme in October, 2003. Her annualized salary for 2003 was $95,000.

Option grants in last fiscal year. The following table sets forth each grant of stock options made during the fiscal year ended December 31, 2003, to each of the named executive officers:
 
 
 
 
 
 
Exercise Price
Expiration Date
 
Potential Realizable Value
Assumed Annual Rates
 
Name
Number of Securities Underlying Options Granted

% of Total Options Granted to Employees in Fiscal Year

Stock Price Appreciation for Option Term  ($)(1)

  5%                 10%

Jonathan Lim, MD (2)
2,471,201
38.1%
$ 0.39
11/11/13
1,569,877
2,499,767
Gregory Frost, PhD (3)
1,235,601
19.1%
$ 0.43
11/11/13
865,445
1,378,077
David Ramsay (4)
741,360
11.4%
$ 0.39
11/11/13
470,963
749,930
Mark Wilson (5)
494,240
7.6%
$ 0.39
11/11/13
313,975
499,953
Carolyn Rynard, PhD (6)
494,240
7.6%
$ 0.39
11/11/13
313,975
499,953


(1)     The potential realizable value at 5% and 10% annual rates of stock price appreciation for each person is based on the market price of the underlying shares of
                common stock on the date each option was granted.
(2)     25% of the options vested on November 11, 2003, 25% vest on May 3, 2004, 25% vest on May 2, 2005 and 25% vest on May 1, 2006.
(3)     25% of the options vest on May 3, 2004, with 1/48 of the shares vesting monthly thereafter.
(4)     25% of the options vest on November 9, 2004, with 1/48 of the shares vesting monthly thereafter.
(5)     25% of the options vest on June 8, 2004, with 1/48 of the shares vesting monthly thereafter.
(6)     25% of the options vest on October 19, 2004, with 1/48 of the shares vesting monthly thereafter.
 
Option exercises in Last Fiscal Year and Fiscal Year End Option Values. The following table sets forth the information with respect to stock option exercises during the year ended December 31, 2003, by the named executive officers, and the number and value of securities underlying unexercised options held by named executive officers at December 31, 2003.
 
  25   
 
 
 
 
 
 
 
 
 
 
Name
 
Shares Acquired Upon Exercise
Unexercisable
 
Value Realized
Exercisable
Number of Securities Underlying
Unexercised Options at December 31, 2003 (#)
Exercisable     Unexercisable
Value of Unexercised In-the-Money Options at December 31, 2003 ($)(1)
      Exercisable       Unexercisable
Jonathan Lim, MD
256,410
—
—
2,214,791
—
—
Gregory Frost, PhD
—
—
—
1,235,601
—
—
David Ramsay
—
—
—
741,360
—
—
Mark Wilson
—
—
—
494,240
—
—
Carolyn Rynard, PhD
—
—
—
494,240
—
—

        (1)     The price of Halozyme’s common stock at fiscal year end minus the exercise price. The fair market value of Halozyme’s common stock at the close of business
                on December 31, 2003 was $0.39.

FINANCIAL STATEMENTS

See the Consolidated Financial Statements beginning on page F-1, “Index to Consolidated Financial Statements.”

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On March 12, 2004, our Board of Directors voted to replace Hall & Company, certified public accountants (“Hall”) and to retain Cacciamatta Accountancy Corporation (“Cacciamatta”) as our principal accountant.

ADDITIONAL INFORMATION

We have filed with the SEC a registration statement on Form SB-2 under the Securities Act for the common stock offered by this prospectus. This prospectus, which is a part of the registration statement, does not contain all of the information in the registration statement and the exhibits filed with it, portions of which have been omitted as permitted by SEC rules and regulations. For further information concerning us and the securities offered by this prospectus, please refer to the registration statement and to the exhibits filed with it. Statements contained in this prospectus as to the content of any contract or other document referred to are not necessarily complete. In each instance, we refer you to the copy of the contracts and/or other documents filed as exhibits to the registration statement and these statements are qualified in their entirety by reference to the contract or document.

The registration statement, including all exhibits, may be inspected without charge at the SEC’s Public Reference Room at 450 Fifth Street, N.W. Washington, D.C. 20549, and at the SEC’s regional offices located at the Woolworth Building, 233 Broadway, New York, New York 10279 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these materials may also be obtained from the SEC’s Public Reference at 450 Fifth Street, N.W., Room 1024, Washington D.C. 20549, upon the payment of prescribed fees. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The registration statement, including all exhibits and schedules and amendments, has been filed with the SEC through the Electronic Data Gathering, Analysis and Retrieval system, and is publicly available through the SEC’s Website located at http://www.sec.gov.


 
  26   
 
 

INFORMATION NOT REQUIRED IN PROSPECTUS

INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Articles of Incorporation of Halozyme Therapeutics, Inc. (the “Registrant”) provide for the indemnification of the directors, officers, employees and agents of the Registrant to the fullest extent permitted by the laws of the State of Nevada. Section 78.7502 of the Nevada General Corporation Law permits a corporation to indemnify any of its directors, officers, employees or agents against expenses actually and reasonably incurred by such person in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (except for an action by or in right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, provided that it is determined that such person acted in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.

Section 78.751 of the Nevada General Corporation Law requires that the determination that indemnification is proper in a specific case must be made by (a) the stockholders, (b) the board of directors by majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding or (c) independent legal counsel in a written opinion (i) if a majority vote of a quorum consisting of disinterested directors is not possible or (ii) if such an opinion is requested by a quorum consisting of disinterested directors.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Act”) may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.

OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

We will pay all expenses in connection with the registration and sale of our common stock. The estimated expenses of issuance and distribution are set forth below.
     
Type of Expense
                 Amount
Registration Fees

$15,739.92

                             
Transfer Agent Fees
$1,000.00
 
Costs of Printing and Engraving
$2,000.00
Legal Fees

$10,000.00

                             
Accounting Fees

   $10,000.00

                           
Total

$38,739.92

                             

RECENT SALES OF UNREGISTERED SECURITIES

There have been no sales of unregistered securities within the last three years, which would be required to be disclosed pursuant to Item 701 of Regulation S-B, except for the following:

In May 2001, Global issued 97,222 shares of our common stock to Carib-Ventures, Inc. in exchange for $17,499.96, and 180,555 shares of our common stock to Flexgene Corp. for $32,499.90. The shares were issued in a transaction which Global believed satisfied the requirements of that certain exemption from the registration and prospectus delivery requirements of the Securities Act of 1933, which exemption is specified by the provisions of Section 5 of that act and Regulation S. There were no commissions paid on the sale of these shares. The net proceeds were approximately $50,000. Both of the investors were non-U.S. persons and the sale was made in an offshore transaction. No directed selling efforts were made in the United States by us or any person acting on Global’s behalf. The offer or sale was not made to a U.S. person or for the account or benefit of a U.S. person. The purchasers of the securities certified that they were not U.S. persons and they were not acquiring the securities for the account or benefit of any U.S. person. The purchaser of the securities has agreed to resell such securities only in accordance with the provisions of Regulation S or pursuant to registration under the Securities Act of 1933. The shares of common stock issued to the purchaser contain a legend to the effect that transfer is prohibited except in accordance with the provisions of this Regulation S or pursuant to registration under the Securities Act of 1933. We will not register any transfer of the securities unless such transfer is made in accordance with the provisions of Regulation S or pursuant to registration under the Securities Act of 1933.
 

 
 
  27   
 
 
In May 2001, Global issued 5,000 shares of common stock to Melissa Day, secretary, treasurer and one of Global’s directors, in exchange for $500, or $0.10 per share. The shares were issued in a transaction which Global believed satisfied the requirements of that certain exemption from the registration and prospectus delivery requirements of the Securities Act of 1933, as amended, which exemption is specified by the provisions of Section 4(2) of that act. Global believed that Ms. Day has such knowledge and experience in financial and business matters that she was capable of evaluating the merits and risks of the prospective investment. In addition, Ms. Day had sufficient access to material information about us because she was Global’s secretary, treasurer and one of the directors.

In February 2001, Global issued 1,000,000 shares of our common stock to Mitch Keeler, Global’s president and one of the directors, in exchange for $10,000, or $0.01 per share. The shares were issued in a transaction which Global believed satisfied the requirements of that certain exemption from the registration and prospectus delivery requirements of the Securities Act of 1933, as amended, which exemption is specified by the provisions of Section 4(2) of that act. Global believed that Mr. Keeler had such knowledge and experience in financial and business matters that he was capable of evaluating the merits and risks of the prospective investment. In addition, Mr. Keeler had sufficient access to material information about us because he was Global’s president and one of the directors.

On March 11, 2004, pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of January 28, 2004, among privately held DeliaTroph Pharmaceuticals, Inc. dba Hyalozyme Therapeutics, Inc. (“Halozyme”), Global Yacht Services, Inc., a publicly traded Nevada corporation (“Global”) and Hyalozyme Acquisition Corporation, a wholly owned subsidiary of Global (“Merger Sub”), the Merger Sub merged with and into Halozyme, with Halozyme remaining as the surviving corporation (the “Merger”). Pursuant to the Merger, Global issued 34,999,701 shares of its restricted common stock, 6,886,807 options and 11,758,460 warrants to purchase shares of its common stock to the stockholders of Halozyme in exchange for 100% of their issued and outstanding common stock, options and warrants to purchase Halozyme’s common stock.

 

 
  28   
 
 

EXHIBITS

 
3.1   Articles of Incorporation (1)
3.2 Certificate of Amendment to Articles of Incorporation (1)

3.3   

Bylaws (1)

3.4  

Certificate of Amendment to Articles of Incorporation (2)

4.1  

Specimen common stock certificate
5.1   Opinion and Consent of Gray Cary Ware & Freidenrich  LLP
10.1     License Agreement between University of Connecticut and Registrant, dated November 15, 2002
10.2*     Agreement for Services between Avid Bioservices, Inc. and Registrant, dated November 19, 2003
10.3     Agreement and Plan of Merger between DeliaTroph Pharmaceuticals, Inc. and Registrant, dated January 28, 2004 (2)
10.4*      Distribution Agreement between MidAtlantic Diagnostics, Inc. and Registrant, dated January 30, 2004
10.5*  Distribution Agreement between MediCult AS and Registrant, dated February 9, 2004
10.6*   Distribution Agreement between Cook Ob/Gyn Incorporated and Registrant, dated April 13, 2004
23.1 Consent of Cacciamatta Accountancy Corporation, Independent Accountants
23.2 5**    Consent of Gray Cary Ware & Freidenrich  LLP (Included in Exhibit 5.1)
     
  (1)   Incorporated by reference to the Registrant’s Registration Statement on Form SB-2 filed with the Commission on September 21, 2001
  (2)   Incorporated by reference to the Registrant’s Information Statement on Schedule 14C filed with the Commission on February 17, 2004       
  *    Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from this agreement and have been submitted separately to the Securities and Exchange Commission.
  **  To be filed by post-effective amendment to this registration statement
                                                               
                                                                               UNDERTAKINGS

 
The undersigned registrant hereby undertakes:
 

1.

To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to:
       
 

 

(a)

Include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

       
  (b) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement;
       
 

 

(c) Include any additional or changed material information on the plan of distribution.
 
2. For determining liability under the Securities Act of 1933, treat each post-effective amendment as a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
   
3. File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of offering.
   
4. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Act”) may be permitted to directors, officers and controlling persons of the   registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such as expressed in the Act and is, therefore, unenforceable.indemnification is against public policy
   
5. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
             
             
 
  29   
 
 
SIGNATURES

In accordance with the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of San Diego, State of California, on April 23, 2004.
 
  Halozyme Therapeutics, Inc.,  
  Nevada corporation    
       
  By: /s/ Jonathan E. Lim            
    Jonathan E. Lim, M.D.  
  Its:  President, Chief Executive Officer and  
    Chairman of the Board  
 
          
In accordance with the requirements of the Securities Act of 1933, this Registration Statement on Form SB-2 has been signed by the following persons in the capacities and on the dates indicated.
 
 
 
By: /s/ Jonathan E. Lim    April 23, 2004  
  Jonathan E. Lim, M.D.    
Its : President, Chief Executive Officer and    
  Chairman of the Board    
  (Principal Executive Officer)    
       
By: /s/ David A. Ramsay April 23, 2004  
  David A. Ramsay    
Its: Secretary, Chief Financial Officer    
  (Principal Financial and Accounting Officer)    
       
By: /s/ Gregory I. Frost April 23, 2004  
  Gregory I. Frost, Ph.D.                    
Its: Vice President, Chief Scientific Officer and Director    
       
By: /s/ Edward L. Mercaldo April 23, 2004  
  Edward L. Mercaldo    
Its: Director    
       
              

 
 
  30   
 
 

 
HALOZYME THERAPEUTICS, INC.
(Formerly GLOBAL YACHT SERVICES, INC.)

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003

CONTENTS


 
  PAGE
Consolidated Financial Statements  
   
Independent Auditor’s Report F-2
   
Consolidated Balance Sheet  F-3
   
Consolidated Statements of Operations F-4
   
Consolidated Statements of Changes in Stockholders’ Equity F-5
   
Consolidated Statements of Cash Flows F-6
   
Notes to Consolidated Financial Statements F-7 - F-12
 

 

DELIATROPH PHARMACEUTICALS, INC.
(A Development Stage Company)

FINANCIAL STATEMENTS

DECEMBER 31, 2003

CONTENTS
 
 
    PAGE
Financial Statements  
   
Independent Auditor’s Report F-13
   
Balance Sheets F-14
   
Statements of Operations  F-15
   
Statements of Changes in Shareholders’ Equity F-16
   
Statements of Cash Flows F-17
   
Notes to Financial Statements F-18 - F-26
 

 
 
  F-1  
 
 
 
 
HALOZYME THERAPEUTICS, INC.
(Formerly GLOBAL YACHT SERVICES, INC.)
Consolidated Financial Statements
December 31, 2003

 
 
 
 
The Board of Directors and Shareholders
Halozyme Therapeutics, Inc. (Formerly Global Yacht Services, Inc.)
 
We have audited the accompanying balance sheet of Halozyme Therapeutics, Inc. (Formerly Global Yacht Services, Inc.), a Nevada corporation, as of December 31, 2003, and the related statements of operations, shareholders’ equity and cash flows for the years ended December 31, 2003 and 2002. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Halozyme Therapeutics, Inc. as of December 31, 2003, and the results of its operations and its cash flows for the years ended December 31, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America.

CACCIAMATTA ACCOUNTANCY CORPORATION
Irvine, CA
March 23, 2004

 
 
  F-2   
 
 

HALOZYME THERAPEUTICS, INC. (Formerly GLOBAL YACHT SERVICES, INC.)
 
 
 
 
CONSOLIDATED BALANCE SHEET
 
 
 
 
YEAR ENDED DECEMBER 31, 2003
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2003
 
ASSETS
 
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
47,517
 
Total Current Assets
 
 
47,517
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
47,517
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
Accounts payable
 
$
32,701
 
Accrued expenses
 
 
4,752
 
Total Current Liabilities
 
 
37,453
 
 
 
 
 
 
 
 
 
 
COMMITMENTS AND CONTINGENCIES
 
 
—
 
 
 
 
 
 
STOCKHOLDERS' EQUITY:
 
 
 
 
Common stock, $0.001 par value;
 
 
 
 
Authorized shares -- 50,000,000
 
 
 
 
Issued and outstanding shares -- 8,196,362
 
 
8,196
 
Additional paid-in-capital
 
 
185,874
 
Accumulated deficit
 
 
(184,006
)
 
 
 
 
 
Total Stockholders' Equity
 
 
10,064
 
 
 
 
 
 
 
 
 
 
 
Total Liabilities and Stockholders' Equity
 
$
47,517
 

 
  F-3   
 
 
 

HALOZYME THERAPEUTICS, INC. (Formerly GLOBAL YACHT SERVICES, INC.)
 
 
 
 
 
 
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
YEARS ENDED DECEMBER 31, 2003 AND 2002
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2003
 
 
 
 
 
2002
 
 
 
 
 
 
 
 
 
 
 
 
REVENUES
 
$
25,705
 
 
 
 
$
87,769
 
 
 
 
 
 
 
 
 
 
 
 
COST OF REVENUES
 
 
27,003
 
 
 
 
 
74,674
 
 
 
 
 
 
 
 
 
 
 
 
GROSS PROFIT (LOSS)
 
 
(1,298
)
 
 
 
 
13,095
 
 
 
 
 
 
 
 
 
 
 
 
GENERAL AND ADMINISTRATIVE EXPENSES
 
 
77,793
 
 
 
 
 
78,358
 
 
 
 
 
 
 
 
 
 
 
 
NET LOSS
 
$
(79,091
)
 
 
 
$
(65,263
)
 
 
 
 
 
 
 
 
 
 
 
Net loss per share, basic and diluted
 
$
(0.01
)
 
 
 
$
(0.01
)
 
 
 
 
 
 
 
 
 
 
 
Shares used in computing net loss per share,
 
 
 
 
 
 
 
 
 
 
basic and diluted
 
 
8,196,362
 
 
 
 
 

7,230,307

 
 

 
 
  F-4   
 
 

HALOZYME THERAPEUTICS, INC. (Formerly GLOBAL YACHT SERVICES, INC.)
 
 
 
 
 
 
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
YEARS ENDED DECEMBER 31, 2003 AND 2002
 
 
 
 
 
 
 
 
 
(All share information reflects post-split amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Paid-In
 
Accumulated
 
Shareholders'
 
 
 
Shares
Amount
 
Capital
 
Deficit
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2001
5,483,874
        $         5,484
 
            $     57,006
 
         $   (39,652
)
    $      22,838
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock for cash, May 10, 2002
2,712,488
                   2,712
 
                 124,188
 
 
 
126,900
 
Cost of occupancy contributed by officer
 
 
 
                     2,340
 
 
 
2,340
 
Net loss
 
 
 
 
 
              (65,263
)
(65,263
)
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2002
8,196,362
        $         8,196
 
            $   183,534
 
        $  (104,915
)
    $      86,815
 
 
 
 
 
 
 
 
 
 
 
 
Cost of occupancy contributed by officer
 
 
 
                     2,340
 
 
 
2,340
 
Net loss
 
 
 
 
 
              (79,091
)
(79,091
)
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2003 8,196,362
        $        8,196  
 

           $    185,874 

 

     $  (184,006

) 

    $     10,064 

 
 
 
 
 
 
 
 
 
 
  F-5   
 
 

HALOZYME THERAPEUTICS, INC. (Formerly GLOBAL YACHT SERVICES, INC.)
 
 
 
 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
 
 
 
 
 
 
YEARS ENDED DECEMBER 31, 2003 AND 2002
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2003
 
 
 
 
2002
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
 
 
 
 
Net loss
 
$
(79,091
)
 
 
$
(65,263
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 
 
 
 
 
Occupancy costs contributed by officer
 
 
2,340
 
 
 
 
2,340
 
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
 
27,019
 
 
 
 
7,145
 
 
 
 
 
 
 
 
 
 
 
Net cash used by operating activities
 
 
(49,732
)
 
 
 
(55,778
)
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
 
 
 
 
Proceeds from issuance of common stock
 
 
—
 
 
 
 
126,900
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by financing activities
 
 
—
 
 
 
 
126,900
 
 
 
 
 
 
 
 
 
 
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
 
(49,732
)
 
 
 
71,122
 
 
 
 
 
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS, beginning of period
 
 
97,249
 
 
 
 
26,127
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS, end of period
 
$
47,517
 
 
 
$
97,249
 
 
 
 
 
 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
 
 
 
 
 
 
Cash paid for income taxes
 
$
—
 
 
 
$
—
 
Interest paid
 
$
—
 
 
 
$
—
 

 
  F-6   
 
 

 
HALOZYME THERAPEUTICS, INC.
(Formerly GLOBAL YACHT SERVICES, INC.)
NOTES TO CONSOLIDATED DECEMBER 31, 2003 FINANCIAL STATEMENTS
 
1.  SUBSEQUENT EVENT – CHANGE IN CONTROL OF REGISTRANT

Effective March 11, 2004, pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated January 28, 2004, among privately held DeliaTroph Pharmaceuticals, Inc. dba Hyalozyme Therapeutics, Inc. (“Halozyme”), Global Yacht Services, Inc., (“Global”) a publicly traded Nevada corporation and Hyalozyme Acquisition Corporation (“Merger Sub”), a wholly owned subsidiary of Global, the Merger Sub merged with and into Halozyme, with Halozyme the survivor for accounting purposes.

Although Global acquired Halozyme as a result of the Merger, the shareholders of Halozyme hold a majority of the voting interest in the combined enterprise. Additionally, the Merger resulted in Halozyme’s management and Board of Directors assuming operational control of Global.

The following lists a summary of the structure of the Merger and matters completed in connection therewith:

  • On January 28, 2004, pursuant to an investment round completed simultaneously with the signing of the Merger Agreement, Halozyme raised equity capital of approximately $8.1 million.
  • The shareholders of Global amended and restated Global’s Articles of Incorporation to change Global’s corporate name to Halozyme Therapeutics, Inc., increased the authorized number of shares of common stock to 100 million, and authorized 20 million shares of preferred stock.
  • Global issued 34,999,701 shares of its restricted common stock, 6,886,807 options and 11,758,460 warrants to purchase shares of its common stock to the shareholders of Halozyme in exchange for 100% of their issued and outstanding common stock, options and warrants to purchase Halozyme’s common stock.
  • A total of 4,296,362 shares of Global’s outstanding common stock were redeemed by Global from three shareholders in exchange for $42,303, or approximately $0.01 per share.
  • Global’s shareholders own approximately 10% of the issued and outstanding shares of Halozyme’s common stock, based on 38,899,701 shares outstanding after the Merger.
The full text of the Merger Agreement may be found at Exhibit A to Global Yacht’s definitive Schedule 14C Information Statement, as filed with the Securities and Exchange Commission on February 17, 2004.

 
  F-7   
 
 
The following pro forma financial data for 2003 is presented to illustrate the estimated effects of the acquisition as if the transaction had occurred at the beginning of 2003.


GLOBAL YACHT SERVICES, INC.
AND HALOZYME THERAPEUTICS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003



 
 
 
 
 
 
 
 
Halozyme
Global
Adjustments
Combined
 
   

2003

   

    2003

   

2003

   

2003

 
 
   
 
   
 
   
 
   
 
 
ASSETS
   
 
   
 
   
 
   
 
 
 
   
 
   
 
   
 
   
 
 
CURRENT ASSETS:
   
 
   
 
   
 
   
 
 
Cash and cash equivalents
 
$
503,580
 
$
47,517
 
$
(47,517
) 
$
503,580
 
   
 
 
 
 
Total Current Assets
   
503,580
   
47,517
   
(47,517
)  
503,580
 
 
   
 
   
 
   
 
   
 
 
PROPERTY AND EQUIPMENT – Net
   
130,904
   
—
   
—
   
130,904
 
 
   
 
   
 
   
 
   
 
 
OTHER ASSETS
   
12,763
   
—
   
—
   
12,763
 
   
 
 
 
 
 
   
 
   
 
   
 
   
 
 
Total Assets
 
$
647,247
 
$
47,517
 
$
(47,517
) 
$
647,247
 
   
 
 
 
 
 
   
 
   
 
   
 
   
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
   
 
   
 
   
 
   
 
 
 
   
 
   
 
   
 
   
 
 
CURRENT LIABILITIES:
   
 
   
 
   
 
   
 
 
Accounts payable
 
$
223,278
 
$
32,701
 
$
67,299
 
$
323,278
 
Accrued expenses
   
50,162
   
4,752
   
(4,752
)  
50,162
 
   
 
 
 
 
Total Current Liabilities
   
273,440
   
37,453
   
62,547
   
373,440
 
 
   
 
   
 
   
 
   
 
 
COMMITMENTS AND CONTINGENCIES
   
—
   
—
   
—
   
—
 
 
   
 
   
 
   
 
   
 
 
SHAREHOLDERS’ EQUITY:
   
 
   
 
   
 
   
 
 
Series C convertible preferred stock
   
1,004,486
   
—
   
—
   
1,004,486
 
Common stock
   
3,349,826
   
8,196
   
(3,342,069
)  
15,953
 
Additional paid-in-capital
   
—
   
185,874
   
3,147,999
   
3,333,873
 
Accumulated deficit
   
—
   
(184,006
)  
184,006
   
—
 
Deficits accumulated during the development stage
   
(3,980,505
)  
—
   
(100,000
)  
(4,080,505
)
   
 
 
 
 
 
   
 
   
 
   
 
   
 
 
Total Shareholders’ Equity
   
373,807
   
10,064
   
(110,064
)   
273,807
 
   
 
 
 
 
 
   
 
   
 
   
 
   
 
 
Total Liabilities and Shareholders’ Equity
 
$
647,247
 
$
47,517
 
$
(47,517
) 
$
647,247
 
   
 
 
 
 

 
  F-8   
 
 

GLOBAL YACHT SERVICES, INC.
AND HALOZYME THERAPEUTICS, INC.
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31, 2003




 
 
Halozyme
Global
Adjustments
Combined
 
   

2003

   

2003

   

2003

   

2003

 
 
   
 
   
 
   
 
   
 
 
REVENUES
 
$
—
 
$
25,705
 
$
(25,705
) 
$
—
 
 
   
 
   
 
   
 
   
 
 
COST OF REVENUES
   
—
   
27,003
   
(27,003
)  
—
 
   
 
 
 
 
 
   
 
   
 
   
 
   
 
 
GROSS PROFIT (LOSS)
   
—
   
(1,298
)  
1,298
   
—
 
 
   
 
   
 
   
 
   
 
 
EXPENSES:
   
 
   
 
   
 
   
 
 
Research and development
   
1,145,420
   
—
   
—
   
1,145,420
 
General and administrative
   
577,252
   
77,793
   
22,207
   
677,252
 
   
 
 
 
 
OPERATING LOSS
   
(1,722,672
)   
(79,091
)   
(20,909
)   
(1,822,672
) 
 
   
 
   
 
   
 
   
 
 
Other income (expense)
   
 
   
 
   
 
   
 
 
Interest expense
   
(394,439
)   
—
   
—
   
(394,439
) 
Other, net
   
2,086
   
—
   
—
   
2,086
 
   
 
 
 
 
 
   
 
   
 
   
 
   
 
 
Other income (expense)
   
(392,353
)   
—
   
—
   
(392,353
) 
 
   
 
   
 
   
 
   
 
 
LOSS BEFORE INCOME TAX
   
(2,115,025
)   
(79,091
)   
(20,909
)   
(2,215,025
) 
 
   
 
   
 
   
 
   
 
 
Income tax expense
   
—
   
—
   
—
   
—
 
   
 
 
 
 
 
   
 
   
 
   
 
   
 
 
NET LOSS
 
$
(2,115,025
) 
$
(79,091
) 
$
(20,909
) 
$
(2,215,025
) 
   
 
 
 
 
 
   
 
   
 
   
 
   
 
 
 
   
 
   
 
   
 
   
 
 
Net loss per share, basic and diluted
 
$
(0.31
) 
$
(0.01
)   
 
 
$
(0.32
) 
   
 
       
 
 
   
 
   
 
   
 
   
 
 
Shares used in computing net loss per share,
   
 
   
 
   
 
   
 
 
Basic and diluted
   
6,826,109
   
8,196,362
   
 
   
6,826,109
 
   
 
       
 
 
 
  F-9   
 
 

2.     BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation - The accompanying consolidated financial statements include the accounts of Global Yacht Services, Inc., incorporated in Nevada on February 21, 2001, and its majority owned subsidiary Global Yacht Services, Ltd. (collectively, “Global”). Global provided chartering, delivery, maintenance and consulting services to luxury yacht owners and manufacturers. All significant inter company accounts and transactions have been eliminated.

Cash Equivalents - For purposes of the balance sheet and statement of cash flows, Global considers all highly liquid debt instruments purchased with maturity of three months or less to be cash equivalents.

Fair Value of Financial Instruments - The carrying amount of Global's financial instruments, which includes cash and accounts payable and accrued expenses, approximate their fair value due to the short period to maturity of these instruments.

Recognition of Revenue - Global records revenues on its services when they are complete, fee is fixed and determinable, and collectibility is reasonably assured. Cost of goods sold consists of fuel, docking fees, supplies and cost of services and related expenses of personnel used.

Advertising Costs - Global expenses all advertising costs as incurred.

Income Taxes - Global recognized deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. Global provided a 100% valuation allowance for its deferred tax assets.

Loss per Common Share - Global has adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128). SFAS 128 requires the reporting of basic and diluted earnings/loss per share. Basic loss per share is calculated by dividing net loss by the weighted average number of outstanding common shares during the period.

Comprehensive Loss - Global applies Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and display of comprehensive income or loss, requiring its components to be reported in a financial statement that is displayed with the same prominence as other financial statements. Global had no other components of comprehensive income or loss other than the net loss as reported on the consolidated statement of operations.

Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
F-10
 

Reclassifications - Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation.

Recent Accounting Pronouncements - In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 91, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of , and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions. This statement also amends Accounting Research Bulletin No. 51, Consolidated Financial Statements , to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The provisions are generally to be applied prospectively. The Company adopted the provisions of this statement effective January 1, 2002. The adoption of SFAS No. 144 did not have a significant impact on the Company’s financial statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities , which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (“ETIF”) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) . SFAS No. 146 requires that a liability for an exit cost, as defined in ETIF Issue 94-3, be recognized at the date of an entity’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The provisions of SFAS No. 146 will be adopted for exit or disposal activities that are initi ated after December 31, 2002.

In November 2002, the FASB issued FASB Interpretation No. (“FIN”) 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others , an interpretation of FASB Statement Nos. 5, 57 and 107, and rescission of FIN 34, Disclosure of Indirect Guarantees of Indebtedness of Others . FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 did not have a significant impact on the Company’s financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS No. 123 . This statement amends SFAS No. 123, Accounting for Stock-Based Compensation , to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.
 
 
 
  F-11   
 
 

 
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic companies. For nonpublic companies, mandatory redeemable financial instruments are subject to the provisions of this statement for the first fiscal period beginning after December 15, 2003. The Company does not believe that the adoption of this statement will have a significant impact on its financial statements.

3.     COMMON STOCK

On November 24, 2003 Global’s Board of Directors approved a 4.275 for 1 stock split of Global’s issued and outstanding common stock. The forward split, which became effective December 5, 2003, was effectuated to facilitate the Merger (see note 1). All references to Global’s common shares in the accompanying financial statements reflect this stock split.

On May 10, 2002, Global issued 2,712,488 shares of its common stock at $0.0468 per share pursuant to the prospectus filed with its registration statement on Form SB-2, for net proceeds of $126,900.

4.     INCOME TAXES

At December 31, 2003, Global had available for federal income tax purposes a net operating loss carryforward of approximately $184,000, expiring at various dates through 2023 and deferred tax assets of approximately $42,000 which was fully offset by a valuation allowance.

5.     RELATED PARTY TRANSACTIONS

Global occupies office space provided by its officer. Accordingly, occupancy costs have been allocated to Global based on the square foot percentage assumed multiplied by the officer's total monthly costs. These amounts are reported as contributions of capital by the officer.
           

* * * * * * *



 
  F-12   
 
 
DELIATROPH PHARMACEUTICALS, INC.
(A Development Stage Company)
Financial Statements
December 31, 2003
 
The Board of Directors and Shareholders
DeliaTroph Pharmaceuticals, Inc.
 
We have audited the accompanying balance sheets of DeliaTroph Pharmaceuticals, Inc., doing business as Hyalozyme Therapeutics, (a California corporation) as of December 31, 2003 and 2002, and the related statements of operations, shareholders’ equity and cash flows for the years then ended and for the period from inception (February 26, 1998) to December 31, 2003. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of DeliaTroph Pharmaceuticals, Inc. as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended and for the period from inception (February 26, 1998) to December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 8 to the financial statements, the Company’s significant operating losses raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding this uncertainty are also described in Note 8. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
CACCIAMATTA ACCOUNTANCY CORPORATION
 
 
Irvine, CA
January 7, 2004
 
 
 
  F-13   
 
 
 

DELIATROPH PHARMACEUTICALS, INC.
 
 
 
 
 
 
 
(A DEVELOPMENT STAGE COMPANY)
 
 
 
 
 
 
 
BALANCE SHEETS
 
 
 
 
 
 
 
DECEMBER 31, 2003 AND 2002
 
 
 
 
 
 
 
 
 
 
2003
 
 
2002
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
503,580
 
$
88,910
 
Total Current Assets
 
 
503,580
 
 
88,910
 
 
 
 
 
 
 
 
 
PROPERTY AND EQUIPMENT - Net
 
 
130,904
 
 
134,170
 
 
 
 
 
 
 
 
 
OTHER ASSETS
 
 
12,763
 
 
7,500
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
647,247
 
$
230,580
 
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
 
 
 
Accounts payable
 
$
223,278
 
$
58,800
 
Accrued expenses
 
 
50,162
 
 
109,085
 
Notes payable
 
 
—
 
 
430,000
 
Interest on notes payable
 
 
—
 
 
12,255
 
Total Current Liabilities
 
 
273,440
 
 
610,140
 
 
 
 
 
 
 
 
 
COMMITMENTS AND CONTINGENCIES:
 
 
—
 
 
—
 
 
 
 
 
 
 
 
 
SHAREHOLDERS' EQUITY (DEFICIT):
 
 
 
 
 
 
 
Series A convertible preferred stock, without par value;
 
 
 
 
 
 
 
4,816,000 shares authorized; 0 shares issued and outstanding
 
 
 
 
 
 
 
in 2003; 3,803,507 shares issued and outstanding in 2002
 
 
—
 
 
198,006
 
Series B convertible preferred stock, without par value; 3,473,343
 
 
 
 
 
 
 
shares authorized; 0 shares issued and outstanding in 2003; 5,333,350
 
 
 
 
 
 
 
shares authorized; 2,743,121 shares issued and outstanding in 2002
 
 
—
 
 
1,254,672
 
Series C convertible preferred stock, without par value; 2,367,394
 
 
 
 
 
 
 
shares authorized; 2,367,114 shares issued and outstanding
 
 
 
 
 
 
 
in 2003; 0 shares issued and outstanding in 2002
 
 
1,004,486
 
 
—
 
Common stock, without par value; 60,000,000 shares authorized;
 
 
 
 
 
 
 
15,952,980 shares issued and outstanding in 2003;
 
 
 
 
 
 
 
4,599,951 shares issued and outstanding in 2002
 
 
3,349,826
 
 
33,242
 
Deficits accumulated during the development stage
 
 
(3,980,505
)
 
(1,865,480
)
Total Shareholders' Equity (Deficit)
 
 
373,807
 
 
(379,560
)
Total Liabilities and Shareholders' Equity (Deficit)
 
$
647,247
 
$
230,580
 

 
  F-14   
 
 
 

DELIATROPH PHARMACEUTICALS, INC.
 
 
 
 
 
 
 
 
 
 
(A DEVELOPMENT STAGE COMPANY)
 
 
 
 
 
 
 
 
 
 
STATEMENTS OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND FROM INCEPTION TO DECEMBER 31, 2003
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative
 
 
 
 
 
 
 
 
 
from inception
 
 
 
 
 
 
 
 
(February 26, 1998)
 
 
 
2003
 
 
2002
 
 
to 2003
 
 
 
 
 
 
 
 
 
 
 
 
EXPENSES:
 
 
 
 
 
 
 
 
 
 
Research and development
 
$
1,145,420
 
$
773,464
 
$
2,410,044
 
General and administrative
 
 
576,452
 
 
379,438
 
 
1,201,145
 
OPERATING LOSS
 
 
(1,721,872
)
 
(1,152,902
)
 
(3,611,189
)
 
 
 
 
 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 
(394,439
)
 
(12,306
)
 
(406,745
)
Other, net
 
 
2,086
 
 
31,243
 
 
42,229
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense)
 
 
(392,353
)
 
18,937
 
 
(364,516
)
 
 
 
 
 
 
 
 
 
 
 
LOSS BEFORE INCOME TAXES
 
 
(2,114,225
)
 
(1,133,965
)
 
(3,975,705
)
 
 
 
 
 
 
 
 
 
 
 
Income tax expense
 
 
800
 
 
800
 
 
4,800
 
NET LOSS
 
$
(2,115,025
)
$
(1,134,765
)
$
(3,980,505
)
Net loss per share, basic and diluted
 
$
(0.31
)
$
(0.25
)
 
 
 
Shares used in computing net loss per share, basic and diluted
 
 
6,826,109
 
 
4,599,591
 
 
 
 

 
  F-15   
 
 
DELIATROPH PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY
(All share information reflects post-split amounts)

 

Series A
Convertible
Preferred Stock

Series B
Convertible
Preferred Stock

Series C
Convertible
Preferred Stock

 
 
Common Stock
 
Shares    Amount

Deficit
Accumulated
During
Development

Total
Shareholders'
equity

 

Shares

Amount

Shares

Amount

Shares

Amount

 
   
 
 
 
 
 
 
 
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Initial capitalization
   
—
   
—
   
—
   
—
   
—
   
—
   
2,078,662
   
10,956
   
—
   
10,956
 
Issuance of Series A preferred stock
   
2,520,014
   
132,819
   
—
   
—
   
—
   
—
   
—
   
—
   
—
   
132,819
 
Net loss
   
—
   
—
   
—
   
—
   
—
   
—
   
—
   
—
   
(41,884
)
 
(41,884
)
   
 
 
 
 
 
 
 
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
BALANCE, DECEMBER 31, 1999
   
2,520,014
   
132,819
   
—
   
—
   
—
   
—
   
2,078,662
   
10,956
   
(41,884
)
 
101,891
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Issuance of common stock for cash
   
—
   
—
   
—
   
—
   
—
   
—
   
2,078,662
   
10,956
   
—
   
10,956
 
Issuance of common stock for license
   
—
   
—
   
—
   
—
   
—
   
—
   
442,267
   
2,330
   
—
   
2,330
 
Issuance of Series A preferred stock - net
   
1,283,493
   
65,187
   
—
   
—
   
—
   
—
   
—
   
—
   
—
   
65,187
 
Net loss
   
—
   
—
   
—
   
—
   
—
   
—
   
—
   
—
   
(125,210
)
 
(125,210
)
   
 
 
 
 
 
 
 
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
BALANCE, DECEMBER 31, 2000
   
3,803,507
   
198,006
   
—
   
—
   
—
   
—
   
4,599,591
   
24,242
   
(167,094
)
 
55,154
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Issuance of Series B preferred stock - net
   
—
   
—
   
1,779,608
   
801,709
   
—
   
—
   
—
   
—
   
—
   
801,709
 
Net loss
   
—
   
—
   
—
   
—
   
—
   
—
   
—
   
—
   
(563,621
)
 
(563,621
)
   
 
 
 
 
 
 
 
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
BALANCE, DECEMBER 31, 2001
   
3,803,507
   
198,006
   
1,779,608
   
801,709
   
—
   
—
   
4,599,591
   
24,242
   
(730,715
)
 
293,242
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Issuance of Series B preferred stock - net
   
—
   
—
   
963,513
   
452,963
   
—
   
—
   
—
   
—
   
—
   
452,963
 
Issuance of common stock options to consultant
   
—
   
—
   
—
   
—
   
—
   
—
   
—
   
500
   
—
   
500
 
Issuance of warrants for common stock for services
   
—
   
—
   
—
   
—
   
—
   
—
   
—
   
8,500
   
—
   
8,500
 
Net loss
   
—
   
—
   
—
   
—
   
—
   
—
   
—
   
—
   
(1,134,765
)
 
(1,134,765
)
   
 
 
 
 
 
 
 
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
BALANCE, DECEMBER 31, 2002
   
3,803,507
   
198,006
   
2,743,121
   
1,254,672
   
—
   
—
   
4,599,591
   
33,242
   
(1,865,480
)
 
(379,560
)
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Issuance of Series C preferred stock - net
   
—
   
—
   
289,482
   
—
   
2,367,114
   
1,004,486
   
—
   
—
   
—
   
1,004,486
 
Issuance of common stock options to consultants
   
—
   
—
   
—
   
—
   
—
   
—
   
—
   
85,388
   
—
   
85,388
 
Issuance of common stock due to the exercise of options
   
—
   
—
   
—
   
—
   
—
   
—
   
256,410
   
100,000
   
—
   
100,000
 
Conversion of notes to common stock
   
—
   
—
   
—
   
—
   
—
   
—
   
3,960,359
   
1,272,000
   
—
   
1,272,000
 
Conversion of interest on notes to common stock
   
—
   
—
   
—
   
—
   
—
   
—
   
300,510
   
99,764
   
—
   
99,764
 
Beneficial conversion feature of 2003 notes
   
—
   
—
   
—
   
—
   
—
   
—
   
—
   
306,754
   
—
   
306,754
 
Conversion of Series A preferred stock to common stock
   
(3,803,507
)
 
(198,006
)
 
—
   
—
   
—
   
—
   
3,803,507
   
198,006
   
—
   
—
 
Conversion of Series B preferred stock to common stock
   
—
   
—
   
(3,032,603
)
 
(1,254,672
)
 
—
   
—
   
3,032,603
   
1,254,672
   
—
   
—
 
Net loss
   
—
   
—
   
—
   
—
   
—
   
—
   
—
   
—
   
(2,115,025
)
 
(2,115,025
)
   
 
 
 
 
 
 
 
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
BALANCE, DECEMBER 31, 2003
   
—
   
—
   
—
   
—
   
2,367,114
   
1,004,486
   
15,952,980
   
3,349,826
   
(3,980,505
)
 
373,807

 

 
  F-16   
 
 

DELIATROPH PHARMACEUTICALS, INC.
 
 
 
 
 
 
 
 
 
 
 
 
(A DEVELOPMENT STAGE COMPANY)
 
 
 
 
 
 
 
 
 
 
 
 
STATEMENTS OF CASH FLOWS
 
 
 
 
 
 
 
 
 
 
 
 
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND
FROM INCEPTION TO DECEMBER 31, 2003
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative
 
                     
from inception
 
 
 
 
 
 
 
 
 
 
 

(February 26,   1998)

 
 
 
2003
 
 
 
 
2002
 
 
  to 2003
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(2,115,025
)
 
 
$
(1,134,765
)
$
(3,980,505
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
75,726
 
 
 
 
100,386
 
 
208,890
 
Issuance of common stock for goods and services
 
 
85,388
 
 
 
 
9,000
 
 
102,245
 
Issuance of common stock for license
 
 
—
 
 
 
 
—
 
 
2,330
 
Issuance of common stock for accrued interest on notes
 
 
87,510
 
 
 
 
12,254
 
 
99,764
 
Beneficial conversion feature on 2003 notes
 
 
306,754
 
 
 
 
—
 
 
306,754
 
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Prepaid expenses and other assets
 
 
(5,263
)
 
 
 
(9,999
)
 
(12,763
)
Accounts payable and accrued expenses
 
 
105,554
 
 
 
 
156,375
 
 
273,440
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash used by operating activities
 
 
(1,459,356
)
 
 
 
(866,749
)
 
(2,999,845
)
 
 
 
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
Purchase of property and equipment
 
 
(72,460
)
 
 
 
(194,738
)
 
(316,695
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash used in investing activities
 
 
(72,460
)
 
 
 
(194,738
)
 
(316,695
)
 
 
 
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from issuance of notes
 
 
842,000
 
 
 
 
430,000
 
 
1,272,000
 
Proceeds from issuance of common stock
 
 
100,000
 
 
 
 
—
 
 
110,956
 
Proceeds from issuance of Series A preferred stock - net
 
 
—
 
 
 
 
—
 
 
178,006
 
Proceeds from issuance of Series B preferred stock - net
 
 
—
 
 
 
 
452,962
 
 
1,254,672
 
Proceeds from issuance of Series C preferred stock - net
 
 
1,004,486
 
 
 
 
—
 
 
1,004,486
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by financing activities
 
 
1,946,486
 
 
 
 
882,962
 
 
3,820,120
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
 
414,670
 
 
 
 
(178,525
)
 
503,580
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS, beginning of period
 
 
88,910
 
 
 
 
267,435
 
 
—
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS, end of period
 
$
503,580
 
 
 
$
88,910
 
$
503,580
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
 
 
 
 
 
 
 
 
 
Cash paid for income taxes
 
$
800
 
 
 
$
800
 
$
4,800
 
Interest paid
 
$
—
 
 
 
$
—
 
$
—
 
Non cash investing and financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Common stock issued for property and equipment
 
$
—
 
 
 
$
—
 
$
3,099
 
Series A preferred stock issued for property and equipment
 
$
—
 
 
 
$
—
 
$
20,000
 
Conversion of notes payable to common stock
 
$
1,371,764
 
 
 
$
—
 
$
1,371,764
 
Conversion of Series A preferred stock to common stock
 
$
198,006
 
 
 
$
—
 
$
198,006
 
Conversion of Series B preferred stock to common stock
 
$
1,254,672
 
 
 
$
—
 
$
1,254,672
 

 
  F-17   
 
 
 
DELIATROPH PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
 
NOTES TO DECEMBER 31, 2003 FINANCIAL STATEMENTS
 
1.     GENERAL AND SIGNIFICANT ACCOUNTING POLICIES

General – DeliaTroph Pharmaceuticals, Inc. (a development stage company) dba Hyalozyme Therapeutics, Inc. (the “Company”) was incorporated on February 26, 1998 and is a development stage, product-focused biotechnology company dedicated to the development and commercialization of recombinant therapeutic enzymes and drug enhancement systems, based on intellectual property covering the family of enzymes known as hyaluronidases.

Basis of Presentation – The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

Cash and Cash Equivalents – The Company considers all highly liquid investments with maturities of three months or less from the original purchase date to be cash equivalents.

Concentration of Credit Risk – Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. The Company maintains its cash balances with one major commercial bank. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000.

Property and Equipment – Property and equipment are recorded at cost. Equipment and furniture are depreciated using the straight-line basis over their estimated useful lives of three years and leasehold improvements are amortized using the straight-line method over the estimated useful life of the asset or the lease term, whichever is shorter.

Long-Lived Assets – The Company accounts for the impairment and disposition of long-lived assets in accordance with Statements of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets . In accordance with SFAS No. 144, long-lived assets are reviewed for events of changes in circumstances, which indicate that their carrying value may not be recoverable. At December 31, 2003, the Company believes there has been no impairment of the value of such assets.

Income Taxes – Income taxes are recorded in accordance with SFAS No. 109, Accounting for Income Taxes . This statement requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company’s assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such assets. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized. At December 31, 2003, the Company had federal and state deferred tax assets of approximately $1,200,000 and $300,000, respectively, both consisting primarily of net operating loss carryforwards. The Company has recorded a full valuation allowance for all net deferred tax assets generated to date. The deferred tax assets and valuation allowances increased approximately $800,000 in 2003. The federal and state net operating losses of approximately $3,400,000 will begin to expire in 2018 and 2008, respectively.

 
  F-18   
 
 
Stock-Based Compensation – The Company has elected to adopt the disclosure only provisions of SFAS No. 148 and will continue to follow APB Opinion No. 25 and related interpretations in accounting for stock options granted to its employees and directors. Accordingly, employee and director compensation expense is recognized only for those options whose price is less than the market value at the measurement date. When the exercise price of the employee or director stock options is less then the estimated fair value of the underlying stock on the grant date, the Company records deferred compensation for the difference and amortizes this amount to expense in accordance with FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Options or Award Plans , over the vesting period of the options.
 
Stock options issued to non-employees are recorded at their fair value as determined in accordance with SFAS No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction With Selling Goods or Services , and recognized over the related service period. Deferred charges for options granted to non-employees are periodically re-measured as the options vest. The Company’s calculations were made using the Black-Scholes option-pricing model with the following weighted-average assumptions: expected life of 48 months; 100% stock volatility; risk-free interest rate of 3.0%; no dividends during the expected term; and forfeitures recognize d as they occur.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the estimated life of the related options. The Company’s pro forma information follows (in thousands except per share data):

      Year Ended  
         
      2003     2002
     
   
Net loss, as reported   $ (2,115)   $ (1,135)
             
Deduct: Total stock-based employee            
Compensation expense determined under            
Fair value based method for all awards   $ (149)   $ (1)
 
Pro forma net loss   $ (2,264)   $ (1,136)
 
Net loss per share, basic and diluted, as reported   $ (0.31)   $ (0.25)
 
Pro forma net loss per share, basic and diluted   $ (0.33)   $ (0.25)
 

 
 
  F- 19  
 
 
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.

Comprehensive Income (Loss) – Comprehensive income (loss) is defined as all changes in a company’s net assets, except changes resulting from transactions with shareholders. At December 31, 2003 and 2002, the Company has no reportable differences between net loss and comprehensive loss.

Research and development costs – Costs and expenses that can be clearly identified as research and development are charged to expense as incurred in accordance with FASB statement No. 2, “Accounting for Research and Development Costs.”

Net loss per share – In accordance with SFAS No. 128, Earnings Per Share , and SEC Staff Accounting Bulletin (“SAB”) No. 98, basic net loss per common share is computed by dividing net loss for the period by the weighted average number of common shares outstanding during the period. Under SFAS No. 128, diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and common equivalent shares, such as stock options and warrants, outstanding during the period. Such common equivalent shares have not been included in the Company’s computation of net loss per share as their effect would have been anti-dilutive.
 
 
2003
2002
       
Numerator - Net loss
 
$
(2,115,025
)
$
(1,134,765
)
   
 
 
 
 
 
 
Denominator - Weighted average shares outstanding
   
6,826,109
   
4,599,591
 
   
 
 
 
   
 
   
 
 
Net loss per share
 
$
(0.31
)
$
(0.25
)
   
 
 
 
   
 
   
 
 
Incremental common shares (not included in denominator of
   
 
   
 
 
diluted earnings per share because of their anti-dilutive nature)
   
 
   
 
 
Employee stock options
   
6,392,567
   
168,710
 
Warrants to outside parties
   
67,129
   
—
 
Warrants on notes
   
867,419
   
315,830
 
Series B warrants
   
361,969
   
361,969
 
Series C warrants
   
2,367,114
   
—
 
Series C option
   
15,304,804
   
—
 
Warrants issuable if Series C option is exercised
   
7,652,402
   
—
 
   
 
 
 
   
 
   
 
 
Potential common equivalents
   
33,013,404
   
846,509
 
   
 
 

If all currently outstanding potential common equivalents are exercised, the Company would receive proceeds of approximately $25.3 million.
 
 
 
  F-20   
 
 
 
Recent Accounting Pronouncements – In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 91, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of , and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions. This statement also amends Account ing Research Bulletin No. 51, Consolidated Financial Statements , to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The provisions are generally to be applied prospectively. The Company adopted the provisions of this statement effective January 1, 2002. The adoption of SFAS No. 144 did not have a significant impact on the Company’s financial statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities , which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (“ETIF”) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for an exit cost, as defined in ETIF Issue 94-3, be recognized at the date of an entity’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The provisions of SFAS No. 146 will be adopted for exit or disposal activities that are initi ated after December 31, 2002.

In November 2002, the FASB issued FASB Interpretation No. (“FIN”) 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others , an interpretation of FASB Statement Nos. 5, 57 and 107, and rescission of FIN 34, Disclosure of Indirect Guarantees of Indebtedness of Others . FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to gua rantees issued or modified after December 31, 2002; while the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company believes the adoption of the recognition provisions of such interpretation will not have a material impact on its results of operations or financial position and has adopted such interpretation on January 1, 2003, as required.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS No. 123 . This statement amends SFAS No. 123, Accounting for Stock-Based Compensation , to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

 
  F-21   
 
 
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic companies. For nonpublic companies, mandatory redeemable financial instruments are subject to the provisions of this statement for the first fiscal period beginning after December 15, 2003. The Company does not believe that the adoption of this statement will have a significant impact on its financial statements.
 
2.        PROPERTY AND EQUIPMENT
 
   

2003

       2002

 
 
 
 
Research equipment
 
$
195,534
 
$
168,445
 
Office equipment and furniture
   
59,687
   
30,254
 
Leasehold improvements
   
84,573
   
68,636
 
   
 
 
 
   
 339,794
   
267,335
 
 
   
 
   
 
 
Less accumulated depreciation and amortization
   
( 208,890
)  
( 133,165
)
   
 
 
 
 
$
130,904
 
$
134,170
 
   
 
 
3.          ACCRUED EXPENSES          
           
   

       2003

 

        2002

 
           
Accrued wages payable     $                 11,000   $                 86,667  
Accrued vacation payable                      39,162
                    22,418
 
    $                 50,162
 
$              109,085
 

The 2002 accrued wages payable were due to two former officers and one current officer of the Company. The former officers were paid their accrued wages of $50,000 in February 2003. The remaining balance of $36,667 was converted to a note payable in February 2003. This note was subsequently converted to common stock (see Note 4).

4.     NOTES PAYABLE

In 2002, the Company issued 10% promissory notes in the amount of $355,000. As amended, principal and interest automatically convert to common stock at $0.449 per share at the closing of the next equity financing in which the Company receives gross proceeds of at least $800,000. Because market value of the common shares was below the conversion price at the commitment date, there was no beneficial conversion feature. The notes carried a 40 percent warrant coverage for the purchase of common stock (see Note 5).

 
  F-22   
 
 
In 2002 and 2003, the Company issued 10% promissory notes in the amount of $917,000. As amended, principal and interest automatically convert to common stock at $0.281 per share at the closing of the next equity financing in which the Company receives gross proceeds of at least $800,000. Because the market value of the shares was above the conversion price at the commitment date, a beneficial conversion feature of $306,754 was recorded as interest expense and additional paid in capital in October 2003, upon the Company’s issuance of $1,004,486 of Series C preferred stock. The notes carried a 20 percent warrant coverage for the purchase of common stock (see Note 5).

Upon closing the Series C preferred financing, the principal balance of $1,272,000 of the above described notes and $99,764 of accrued interest were converted into 4,260,869 shares of common stock of the Company.
 
5.   SHAREHOLDERS’ EQUITY

Issuance of Common Stock – In March 1999, the Company issued 2,078,662 shares of common stock for $10,956 in goods and services. In January 2000, the Company issued 2,078,662 shares of common stock for $10,956 in cash. In August 2000, the Company issued 442,267 shares of common stock in exchange for a license valued at $2,330. Of the common stock 4,157,324 shares were sold to founders of the Company.

Issuance of Common Stock Options for Services – In September 2002, the Company issued 7,897 common stock options for consulting services valued at $500. In January 2003, the Company issued 39,488 common stock options for consulting services valued at $2,500. In April 2003, the Company issued 39,488 common stock options for consulting services valued at $2,500. In October 2003, the Company issued 39,488 common stock options for consulting services valued at $2,500. In November 2003, the Company issued 24,712 common stock options for consulting services valued at $9,638. In December 2003, the Company issued 100,000 common stock options to two former Board members and 75,000 common stock options to members of its Scientific Advisory Board. These options were fully exercisable and fully vested on the date of grant and shall expire in ten years based on the terms of the options. The fair value of these options, totaling $68,250, was recorded as a noncash stock issuance cost by the Company.

Series A, B and C Convertible Preferred Stock – In January 2001, the Company completed an 8 for 1 stock split of its outstanding common stock and Series A preferred stock. In November 2001 the Company completed a 2 for 1 stock split for the Series B preferred stock and warrants. In October 2003, the Company completed a 1 for 1.266199 reverse stock split of all its common stock. All share numbers and per share dollar values in the accompanying financial statements and footnotes have been restated for all periods presented to reflect the stock splits.

 
 
  F-23   
 
 
From March 1999 to January 2000, the Company sold 3,803,507 shares of Series A convertible preferred stock (“Series A”) for $198,006 ($178,006 in cash and $20,000 in goods and services), net of issuance costs. From March 2001 to May 2002, the Company sold 2,743,121 shares of Series B convertible preferred stock (“Series B”) for $1,254,672 in cash, net of issuance costs. During October 2003, the Company sold 2,367,114 shares of Series C convertible preferred stock (“Series C”) for $1,004,486, net of issuance costs. In addition, in connection with the Series C financing, the Company issued an option to purchasers of the Series C to buy an additional 15,304,804 shares of the Company’s common stock for $0.4647 per share or $7,112,142. In connection with the Series C financing, 289,482 additional shares of Series B stock were issued to the Series B investo rs as a result of anti-dilution provisions.

Upon closing the Series C investment, the Series A and Series B were all converted to common stock. The liquidation preference of the Series C is $0.4647 per share and is payable in preference to the common stock. Following this distribution, upon liquidation, any remaining assets of the Company shall be distributed ratably to holders of the common stock.

Warrants – In November and December of 2001, the Company granted warrants to purchase 252,721 shares of common stock at an exercise price of $0.4748 per share to purchasers of the Series B. From January to May 2002, the Company granted warrants to purchase 109,248 shares of common stock at an exercise price of $0.4748 per share to purchasers of the Series B. These warrants are exercisable until February 15, 2005.
 
In June 2002, the Company granted, to outside parties for services, warrants to purchase 67,129 shares of common stock at an exercise price of $0.13 per share. These warrants were fully exercisable and fully vested on the date of grant and shall expire in ten years based on the terms of the warrants. The fair value of these warrants, totaling $8,500, was recorded as a noncash stock issuance cost by the Company.
 
In connection with the notes issued in 2002 and 2003 (see Note 4), the Company granted warrants to purchase 867,419 shares of common stock at an exercise price of $0.4496 per share. In October 2003, in conjunction with the issuance of its Series C convertible preferred stock, the Company granted warrants to purchase 2,367,114 shares of common stock to purchasers of the Series C at an exercise price of $0.7667 per share, exercisable until October 15, 2008.
 
In connection with an option the Company issued to purchasers of the Series C stock to buy an additional 15,304,804 disclosed above, the Company also granted these purchasers warrants to purchase 7,652,402 shares of common stock at an exercise price of $1.75 per share, as amended.
 
6.     STOCK OPTION PLAN

The Company’s 2001 Stock Option Plan (the “Plan”), as amended, provides for the granting of non-statutory or incentive stock options to acquire shares of the Company’s common stock to employees of the Company. The Plan is administered by the Board of Directors and permits the issuance of options for the purchase of up to 10,000,000 shares, as amended, of the Company’s common stock at exercises prices of not less than the fair market value of the underlying shares on the date of grant. Options granted under the Plan generally vest over a four-year period and expire up to a maximum of 10 years from the date of grant.

 
  F-24   
 
 
The following table summarizes stock option activity for the periods indicated:

 
 
 
Weighted
 
 
 
Average
 
 
 
Exercise
 
 
 
Price
 
 
Shares
Per Share
 
   
 
   
 
 
Outstanding, January 1, 2002
   

--

   

--

 
 
   
 
   
 
 
Granted
   
179,037
 
$
0.06
 
Canceled
   
(10,327
)
$
0.06
 
   
       
 
   
 
   
 
 
Outstanding, December 31, 2002
   
168,710
 
$
0.06
 
 
   
 
   
 
 
Granted
   
6,484,962
 
$
0.39
 
Exercised
   
(256,410
)
$
0.39
 
Canceled
   
(4,695
)
$
0.06
 
   
       
 
   
 
   
 
 
Outstanding, December 31, 2003
   
6,392,567
 
$
0.38
 
   
       



The following table summarizes information concerning on outstanding and exercisable options as of December 31, 2003:

    Options Outstanding Options Exercisable
   
     
Weighted
     
 
 
 
Average
Weighted
 
Weighted
 
 
 
Remaining
Average
 
Average
Exercise
 
Number
Contractual
Exercise
Number
Exercise
Price
   
Outstanding
   

Life

   

Price

   
Exercisable
   

Price

 

 

   
 
         
 
   
 
   
 
 

$0.06

   
164,015
   
5.5
 
$
0.06
   
61,714
 
$
0.06
 

$0.39

   
6,228,552
   
9.9
 
$
0.39
   
705,153
 
$
0.39
 
 
   
   
 
   
 
   
   
 
 
 
   
6,392,567
   
9.8
 
$
0.38
   
766,867
 
$
0.36
 
     
               
       

7.     COMMITMENTS AND CONTINGENCIES

Operating Leases – The Company leases its San Diego, California corporate office under a two-year lease. Additionally, the Company leases certain office equipment under operating leases. Rent expense totaled $123,110 and $64,958 for the years ended December 31, 2003 and 2002, respectively.

 
  F-25  
 
 
Future minimum payments, by year and in the aggregate, required under the Company’s noncancelable operating lease obligations consist of the following:
 
Year Ending
December 31
2004
 

$              132,306

2005
 

67,492

   
 
   
199,798
   
 

Contract Manufacturing Agreement – In November 2003, the Company entered into a contract manufacturing agreement whereby the contractor will manufacture the Company’s recombinant protein to be used as the Company seeks regulatory approval for its product. The value of the contract is approximately $1,500,000 and is payable as milestones are achieved over the term of the contract in 2004.

Consulting Agreements – In November and December 2003, the Company entered into consulting agreements with key members of its Scientific Advisory Board. In connection with these agreements, the Company issued stock options to some of these members. As discussed in Note 4, the Company recorded the fair value of these options as an expense on the date of grant.
 
Management Agreements – The Company has entered into employment agreements with various members of its executive management team. The agreements are for one year and then revert to “at will” employment.
 
Indemnities and Guarantees – During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include those given to directors and officers of the Company to the maximum extent permitted under the laws of the State of California. The duration of these indemnities, commitments and guarantees varies. Some of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying balance sheets.
 
Merger Agreement – The Company is currently in negotiations to merge with a public company in order to maximize shareholder value. The terms of the agreement have not yet been finalized.
 
8.     GOING CONCERN
 
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has reported losses from its inception, is still in the development stage and does not have sufficient cash to cover its current operating needs. The Company is seeking to raise the additional capital it will require to meet its obligations in 2004. There can be no assurances that the Company will be successful in these efforts.

* * * * * * *



 
  F-26   
 
 
 

Exhibit 10.1

 

LICENSE AGREEMENT

 
between the

 
UNIVERSITY OF CONNECTICUT HEALTH CENTER

and
 
DELIATROPH PHARMACEUTICALS, INC.
 
 
 
 
  i   
 


 


TABLE OF CONTENTS









R E C I T A L S ............................................................................................................1

1. Definitions. ............................................................................................................... 1

2. Grant of Rights. ......................................................................................................... 3

3. Royalties and Payment Terms ...................................................................................4

4. Company Diligence Obligations. ............................................................................... 5

5. Records and Reports ................................................................................................. 6

6. Confidentiality……………………………………………………………………...6

7. Patent Prosecution………………………………………………………………….7

8. Infringement………………………………………………………………………...7

9. Indemnification and Insurance………………………………………………………9

10. No Representations or Warranties………………………………………………...10

11. Termination………………………………………………………………………..10

12. Dispute Resolution………………………………………………………………...11

13. Miscellaneous…………………………………………………………………......12



  ii   

 
This License Agreement, effective as of the 15th day of November, 2002 (the "EFFECTIVE DATE"), is between the University of Connecticut Health Center ("UCHC"), a public institution of higher education, c/o the Center for Science and Technology Commercialization, with a principal office at 263 Farmington Avenue, Farmington, CT 06030-6207, and DeliaTroph Pharmaceuticals, Inc. ("DELIATROPH"), a California Corporation, with a principal place of business at 11588 Sorrento Valley Road, Suite 16, San Diego, CA 92121.
 
R E C I T A L S

WHEREAS, UCHC is the owner of certain PATENT RIGHTS (as later defined herein) relating to U.S. Patent Number 5,721,348 issued February 24, 1998, entitled, “DNA Encoding PH-20 Proteins,” by Paul Primakoff and Diana G. Myles and has the right to grant licenses under said PATENT RIGHTS;

WHEREAS, UCHC desires to have the PATENT RIGHTS developed and commercialized to benefit the public and is willing to grant a license hereunder;
 
WHEREAS, DELIATROPH has represented to UCHC, to induce UCHC to enter into this Agreement, that DELIATROPH shall commit itself to a diligent program of exploiting the PATENT RIGHTS so that public utilization shall result therefrom; and
 
WHEREAS, DELIATROPH desires to obtain a license under the PATENT RIGHTS upon the terms and conditions hereinafter set forth.

NOW, THEREFORE, in consideration of the mutual covenants and agreements of the parties herein contained, UCHC and DELIATROPH, intending to be legally bound, do hereby agree as follows:
 
1.     DEFINITIONS

1.1   " AFFILIATE " shall mean any legal entity (such as a corporation, partnership, or limited liability company) that is controlled by DELIATROPH or itself controls DELIATROPH. For the purposes of this definition, the term "control" means (i) beneficial ownership of at least fifty percent (50%) of the voting securities of a corporation or other business organization with voting securities or (ii) a fifty percent (50%) or greater interest in the net assets or profits of a partnership or other business organization without voting securities.

1.2 " FIELD " shall mean use of the PATENT RIGHTS for any and all purposes.

1.3 “ LICENSED PRODUCT ” shall mean any product which (or the use of which) absent the license granted hereunder, would infringe one or more Valid Claims of the PATENT RIGHTS.

 
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1.4  " NET SALES " shall mean the gross amount billed by DELIATROPH and/or its AFFILIATES for sale of LICENSED PRODUCTS less the following:

(a) import, export, excise , value-added, use, sales taxes and other direct taxes incurred ;

(b)     custom duties, surcharges and other governmental charges incurred in connection with the exportation or importation of such LICENSED PRODUCT;

(c)     c osts of insurance, packing and transportation from the place of manufacture to the customer’s premises or point of installation; and

(d)     credits for returns, allowances , trades, discounts and rebates to, and chargebacks from the account of, customers for spoiled, damaged, out-dated, rejected or returned LICENSED PRODUCT .

NET SALES shall occur on the date of billing for the LICENSED PRODUCT. Distributions or tra nsfers of any LICENSED PRODUCT among DELIATROPH’S AFFILIATES shall not be deemed royalty-bearing sales for purposes of calculating NET SALES unless and until such distributed or transferred LICENSED PRODUCT is resold to a third party in a transaction that is included in NET SALES.

1.5   " PATENT RIGHTS " shall mean:
 
               (a)  U.S. Patent Number 5,721,348 issued February 24, 1998, entitled “DNA Encoding PH-20 Proteins.”;
 
   (b)  utility applications converted therefrom;
 
   (c)   continuing applications thereof (including divisionals, substitutions, continuations and continuation-in-part applications);
 
   (d) foreign counterparts, if any, to any of the foregoing including without limitation utility models, design patents and certificates of invention; and
   (e) patents including reissues, renewals, reexaminations, extensions or additions issuing from any of the applications described in (b), (c), and (d).
 
1.6  " REPORTING PERIOD " shall begin on the first day of each calendar quarter and end on the last day of such calendar quarter.

1.7   " SUBLICENSE INCOME " shall mean any cash payments that DELIATROPH or an AFFILIATE receives from a SUBLICENSEE in sole consideration of and solely associated with the sublicense of the rights granted DELIATROPH and AFFILIATES under Section 2.2, including sublicense fees, sublicense maintenance fees, sublicense milestone payments, and sublicense royalties on sales but specifically excluding research and development payments.

1.8   " SUBLICENSEE " shall mean any non-AFFILIATE sublicensee of the rights granted DELIATROPH under Section 2.2.

 
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1.9   " TERM " shall mean the term of this Agreement, which shall commence on the EFFECTIVE DATE and shall remain in effect until the expiration or abandonment of all issued patents within the PATENT RIGHTS, unless earlier terminated in accordance with the provisions of this Agreement.

1.10  " TERRITORY " shall mean worldwide.

1.11   “ VALID CLAIM ” shall mean a claim of an issued and unexpired patent included within the PATENT RIGHTS which has not been held permanently revoked, unenforceable or invalid by a decision of a court or other governmental agency of competent jurisdiction, unappealable or unappealed within the time allowed for appeal, and which has not been admitted to be invalid or unenforceable through reissue or disclaimer or otherwise.

2.     GRANT OF RIGHTS

2.1  License Grants . Subject to the terms of this Agreement, UCHC hereby grants to DELIATROPH and its AFFILIATES for the TERM an exclusive license under the PATENT RIGHTS to research, develop, make, have made, use, sell, offer to sell, lease, and import LICENSED PRODUCTS in the FIELD in the TERRITORY.

2.2   Sublicenses . DELIATROPH shall have the right to grant sublicenses of its rights under Section 2.1 herein ; provided, however, that DELIATROPH shall incorporate terms and conditions into its sublicense agreements sufficient to enable DELIATROPH to comply with this Agreement. DELIATROPH shall promptly notify UCHC of any such sublicenses and within thirty (30) days following the execution of such sublicense shall provide UCHC with a copy of such sublicense; provided, however, that DELIATROPH shall have the right to redact confidential technical, financial or business information that DELIATROPH reasonably believes should be redacted for competitive reasons, but in no case shall DELIATROPH exclude any information necessary for UCHC to determine the compliance of DELIATROPH with the terms and obligations of this Agreement. UCHC shall inform DELIATROPH of third parties expressing interest to UCHC in acquiring such a sublicense ; provided, however that DELIATROPH is under no obligation to grant such a sublicense . Upon termination of this Agreement for any reason, any SUBLICENSEE not then in default shall have the right to seek a license from UCHC. UCHC agrees to negotiate such licenses in good faith under reasonable terms and conditions.

2.3  U.S. Manufacturing . To the extent required by applicable law, DELIATROPH agrees to use its commercially reasonable efforts consistent with good business judgment to assure that any LICENSED PRODUCTS used or sold in the United States will be manufactured substantially in the United States.

2.4  Retained Rights . UCHC retains the right to make non-commercial use of the PATENT RIGHTS solely for its internal research, teaching, and educational purposes.

2.5  Federal Government . To the extent that UCHC’s PATENT RIGHTS were developed with the support of federal funding, DELIATROPH acknowledges that the U.S. federal government retains a royalty-free, non-exclusive, non-transferable license to practice any government-funded invention claimed in any PATENT RIGHTS to the extent required by 35   U.S.C. §§201-211, and the regulations promulgated there under, as amended, or any successor statutes or regulations.
 

 
 
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2.6   Ownership . DELIATROPH shall own without restriction and without charge or royalty to UCHC all intellectual property and technology that it had rights to prior to the EFFECTIVE DATE of this Agreement, or that it develops or which is developed for it or on its behalf by a third party during the term of this Agreement. Nothing in this Agreement will impair DELIATROPH’S right to independently acquire, license, develop for itself, or have others develop for it, intellectual property and technology performing similar functions as the PATENT RIGHTS or to market and distribute products other than PRODUCTS based on such other intellectual property and technology. All PATENT RIGHTS shall be owned by UCHC and shall be subject to the terms of this Agreement.

2.7   No Additional Rights . Other than as contemplated elsewhere in this Agreement nothing in this Agreement shall be construed to confer any rights upon DELIATROPH by implication, estoppel, or otherwise as to any technology or patent rights of UCHC or any other entity other than the PATENT RIGHTS.

3.     ROYALTIES AND PAYMENT TERMS

3.1  Consideration for Grant of Rights .

(a)   Annual License Fee. DELIATROPH shall pay to UCHC an Annual License Fee of Five-Thousand dollars ($5,000) within thirty (30) da ys following the EFFECTIVE DATE, and every anniversary of the EFFECTIVE DATE thereafter until the first sale of LICENSED PRODUCT in the TERRITORY.

   (b)   Milestone Payments . DELIATROPH shall pay to UCHC the following amounts for reaching the associated clinical milestones for the first time for each LICENSED PRODUCT anywhere in the TERRITORY:

Start of Phase I, or first dose into man:     $25,000
 
                                     Start of Phase II, or equivalent:      $50,000

Start of Phase III, or equivalent:     $100,000

Filing of an NDA or equivalent:      $250,000

Launch of first LICENSED PRODUCT:   $500,000

As used in this Section 3.1(b) the “start” of each Phase trial shall mean the first administration to the first patient in the first trial for such Phase.

(c)   Minimum Royalties . Commencing in the year of the first sale of LICENSED PRODUCT, DELIATROPH shall pay to UCHC an annual minimum royalty of Ten-Thousand Dollars ($10,000), which shall be increased 25% every two years thereafter. Minimum royalties shall be payable and due to UCHC within thirty (30) days following the end of the calendar year in which payment is due.

(d)   Running Royalties . DELIATROPH shall pay to UCHC a running royalty of four percent (4.0%) of NET SALES of LICENSED PRODUCTS. Running royalties shall be payable for each REPORTING PERIOD and shall be due to UCHC within sixty ( 60 ) days following the end of each REPORTING PERIOD.

 
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(e)   Share of SUBLICENSE INCOME . DELIATROPH shall pay UCHC a total of thirty-five percent (35%) of SUBLICENSE INCOME received by DELIATROPH or AFFILIATES. Such amount shall be payable for each REPORTING PERIOD and shall be due to UCHC within sixty ( 60 ) days following the end of each REPORTING PERIOD.

(f)   Combination Product . In the event a LICENSED PRODUCT is sold in a combination product with one or more other biologically active components and/or devices for administering or dispensing such LICENSED PRODUCT, Net Sales, for purposes of royalty payments on the combination product, shall be calculated by multiplying the Net Sales of that combination product by the fraction A/B, where A is the gross selling price of the LICENSED PRODUCT sold separately and B is the gross selling price of the combination product. In the event that no such separate sales are made by DELIATROPH, its AFFILIATES or permitted sublicensees, Net Sales for royalty determination shall be calculated by multiplying Net Sales of the combination product by the fraction C/(C+D), where C is the fully allocated cost of the LICENSED PRODUCT and D is the fully allocated cost of such other biologically active components and/or devices.

(g)   Obligations to pay Third Party Running Royalty . In the event DELIATROPH, its AFFILIATES or SUBLICENSEES is obligated to make running royalty payments to any third party(ies) for the sale of a LICENSED PRODUCT in the FIELD, such that the aggregate running royalties due to UCHC and such third party(ies) exceed 7.5% of NET SALES, then DELIATROPH shall have the right to reduce the amount of running royalties due to UCHC under Sections 3.1(d) proportionately with the amount of running royalties due to such third party(ies) such that the aggregate running royalty payable by DELIATROPH is equal to 7.5% with respect to sales of such LICENSED PRODUCT; provided, however, that DELIATROPH shall not reduce the amount of the royalties paid to UCHC under Sections 3.1(d), with respect to sales of such LICENSED PRODUCT, to less than one-half (1/2) of the applicable running royalty owed by DELIATRIOPH to UCHC for the sale of such LICENSED PRODUCT (as calculated before giving effect to this Section 3.1(g)(i)).

(h)   Obligations to pay Share of SUBLICENSE INCOME to Third Party(ies) . In the event that DELIATROPH, its AFFILIATES, or SUBLICENSEES is obligated to make payments of a share of SUBLICENSE INCOME to any third party(ies) such that the aggregate share of SUBLICENSE INCOME due to UCHC and such third party(ies) exceeds fifty percent (50%) of the SUBLICENSE INCOME received by DELIATROPH, then DELIATROPH shall have the right to reduce the share of SUBLICENSE INCOME due to UCHC under Section 3.1(e) proportionately with the share of SUBLICENSE INCOME due to such third party(ies) such that the aggregate share of SUBLICENSE INCOME payable by DELIATROPH is equal to fifty percent (50%) of SUBLICENSE INCOME; provided, however, that DELIATROPH shall not reduce the share of SUBLICENSE INCOME paid to U CHC under Section 3.1(e) to less than one-half (1/2) of the applicable share of SUBLICENSE INCOME owed by DELIATROPH to UCHC (as calculated before giving effect to this Section 3.1(g)(ii)).

(i)   This Section 3.1(i) expressly does not apply to running royalties or share of SUBLICENSE INCOME paid by DELIATROPH to third party(ies) with respect to other biologically active components included in any combination product as described in Section 3.1(f).

 
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(j)   No Multiple Royalties . If the manufacture, use, lease, or sale of a ny LICENSED PRODUCT is covered by more than one of the PATENT RIGHTS, multiple royalties shall not be due.

3.2   Payments .

(a)  Method of Payment . All payments under this Agreement should be made payable to the "University of Connecticut Health Center" and sent to the address identified in Section 13.6. Each payment should reference this Agreement and identify the obligation under this Agreement that the payment satisfies.

(b)   Payments in U.S. Dollars . All payments due under this Agreement shall be drawn on a United States bank and shall be payable in United States dollars. Conversion of foreign currency to United States dollars shall be made using the exchange rate for ( local currency per US$1) published in The Wall Street Journal , Western Edition, under the heading "Currency Trading" on the last business day of the REPORTING PERIOD or on the last business day of the calendar year for annual payments. Such payments shall be without deduction of exchange, collection, or other charges, and, specifically, without deduction of withholding or similar taxes or other government imposed fees or taxes, except as permitted in the definition of N ET SALES.

(c)   Late Payments . Any payment obligations by DELIATROPH that are not paid on or before the date such payments are due under this Agreement shall bear interest, to the extent permitted by law, at two percentage points above the Prime Rate of interest as published in The Wall Street Journal , Western Edition, under the heading “Money Rates” on the date payment is due or, if such date is not a business day, then the last business day prior to such date .

4.     COMPANY DILIGENCE OBLIGATIONS

4.1  Diligence Requirements . DELIATROPH shall use diligent efforts, or shall cause its AFFILIATES to use diligent efforts, to develop LICENSED PRODUCTS, and to introduce LICENSED PRODUCTS into the commercial market; thereafter , subject to sound business judgment , DELIATROPH or its AFFILIATES shall make LICENSED PRODUCTS reasonably available to the public. Specifically, DELIATROPH or AFFILIATE shall fulfill the following obligations:

(a)   Within ninety (90) days following the EFFECTIVE DATE, DELIATROPH shall furnish UCHC with a written Development and Marketing Plan for a LICENSED PRODUCT, which shall include the definition of key development milestones to be achieved, the dates by which such milestones are targeted to be achieved, and how and when a LICENSED PRODUCT will be marketed; provided, however, that DELIATROPH shall have no obligation to disclose confidential technical, financial or business information that DELIATROPH reasonably believes should not be disclosed for competitive reasons, but in no case shall DELIATROPH exclude any information necessary for UCHC to determine the compliance of DELIATROPH with the terms and obligations of this Agre ement.

 
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(b) Within thirty (30) days after the end of each calendar year, DELIATROPH shall furnish UCHC with a written report describing its efforts during the immediately preceding calendar year to develop and commercialize LICENSED PRODUCTS, including its progress toward the clinical milestones as described in Sections 3.1(b) and key development milestones as described in Section 4.1(a); provided, however, that DELIATROPH shall have no obligation to disclose confidential technical, financial or business information that DELIATROPH reasonably believes should not be disclosed for competitive reasons, but in no case shall DELIATROPH exclude any information necessary for UCHC to determine the compliance of DELIATROPH with the terms and obligations of this Agreement . The report shall also contain a discussion of any and all sublicensing activities that occurred during the same year. The report will contain a description of intended efforts and sales projections (if any) for the next calendar year, i.e. the calendar year in which the report is submitted.

(c)  In the event that UCHC determines, with reasonable evidence, that DELIATROPH or an AFFILIATE has failed to fulfill any of its obligations under this Article 4, then UCHC may treat such failure as a material breach in accordance with Section 11.3(b).

5.     RECORDS AND REPORTS

5.1  Records . DELIATROPH shall maintain, and shall cause its AFFILIATES to maintain, complete and accurate records relating to the rights and obligations under this Agreement and any amounts payable to UCHC in relation to this Agreement, which records shall contain sufficient information to confirm the accuracy of any reports and payments delivered to UCHC .

5.2   Records Retention . The relevant party shall retain such records for at least five (5) years following the end of the calendar year to which they pertain.

5.3   Audit Request. Upon the written request of UCHC and not more than once in each calendar year, DELIATROPH shall permit an independent certified public accounting firm of nationally recognized standing, selected by UCHC and reasonably acceptable to DELIATROPH , at UCHC's expense, to have access during normal business hours to such of the records of DELIATROPH as may be reasonably necessary to verify the accuracy of the reports described in Section 5.5 hereunder in any year ending not more than forty-eight (48) months prior to the date of such request. The accounting firm shall disclose to UCHC only whether the reports are correct or not and the specific details concerning any discrepancies. No other information shall be shared. If such accounting firm concludes that additional royalties were owed during the audited period, DELIATROPH shall pay such additional royalties within thirty (30) days of receiving notice thereof from UCHC with a copy of such accounting firm's written report so concluding. The fees charged by such accounting firm shall be paid by UCHC; provided, however, that if the audit discloses that the royalties payable by DELIATROPH for such period are more than one hundred ten percent (110%) of the royalties actually paid for such period, then DELIATROPH shall pay the reasonable fees and expenses charged by such accounting firm .

5.4   Frequency of Reports .

(a)   Before First Commercial Sale . Prior to the first commercial sale of any LICENSED PRODUCT, DELIATROPH shall deliver reports to UCHC annually, within thirty (30) days following the end of each calendar year, containing information concerning the immediately preceding calendar year, as described in Section 4.1(b).

 
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(b)   Upon First Commercial Sale of a LICENSED PRODUCT. DELIATROPH shall report to UCHC the date of first commercial sale of a LICENSED PRODUCT within thirty (30) days following occurrence in each country.

(c)   After First Commercial Sale . After the first commercial sale of a LICENSED PRODUCT, DELIATROPH shall deliver reports to UCHC within thirty (30) days following the end of each REPORTING PERIOD, containing information concerning the immediately preceding REPORTING PERIOD, as further described in Section 5.5.

5.5   Content of Reports and Payments . Each report delivered by DELIATROPH to UCHC shall contain at least the following information for the immediately preceding REPORTING PERIOD:

(a)  the number of LICENSED PRODUCTS sold by DELIATROPH and its AFFILIATES to independent third parties in each country;

(b)  the gross price billed by DELIATROPH and its AFFILIATES for each LICENSED PRODUCT in each country;

(c)  calculation of NET SALES for the applicable REPORTING PERIOD in each country, including a listing of applicable deductions;

(d)  total royalty payable on NET SALES in U.S. dollars, together with the exchange rates used for conversion;

(e)   the amount of SUBLICENSE INCOME received by DELIATROPH from each SUBLICENSEE and the amount due to UCHC from such SUBLICENSE INCOME, including an itemized breakdown of the sources of income comprising the SUBLICENSE INCOME; and

(f)  the number of sublicenses entered into for the PATENT RIGHTS.

If no amounts are due to UCHC for any REPORTING PERIOD, the report shall nevertheless be delivered and shall so state.

6.  CONFIDENTIALITY

6.1   Confidential Information . As used herein “Confidential Information” shall mean, with respect to a party, all information which is owned or controlled by such party, is disclosed by such party to the other party pursuant to this Agreement, and (a) if disclosed in writing or digital medium, is marked or otherwise identified as confidential when disclosed to the other party or (b) in the case of information otherwise disclosed, is identified as confidential in a written document received by the other party within thirty (30) days after such other disclosure.

6.2  DELIATROPH Confidential Information . All reports provided to UCHC by DELIATROPH pursuant to this Agreement shall be “Confidential Information.” UCHC shall not disclose the Confidential Information of DELIATROPH to any third party without the prior written consent of DELIATROPH; provided, however, that disclosures may be made as required by applicable law , order or regulation of a governmental agency or a court of competent jurisdiction .

 
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6.3  UCHC Confidential Information . DELIATROPH agrees not to disclose to any third party the Confidential Information of UCHC, unless already covered by a pending U.S. patent application or issued U.S. patent, without the prior written consent of UCHC; provided, however, that disclosures may be made (i) pursuant to applicable law, order or regulation of a governmental agency or a court of competent jurisdiction , (ii) to disclose information to any governmental agency for purposes of obtaining approval to test or market a product, (iii)  in confidence, to actual or prospective investors , (iv) in confidence, to actual or prospective corporate and business partners, or (v)  to DELIATROPH’S accountants, attorneys, and other professional advisors.

6.4   Exclusions from Confidentiality . Obligations under this Article shall not extend to any part of Confidential Information (i) that can be demonstrated to have been in the public domain or publicly known and readily available to the trade or the public prior to the date of the disclosure; (ii) that can be demonstrated, from written records to have been made available to recipient by another source not under obligation of confidentiality to the disclosing party; (iii)   that can be demonstrated from written records to have been independently developed by the recipient without reference to such Confidential Information ; or (iv) that becomes part of the public domain or publicly known by publication or otherwise, not due to any unauthorized act by recipient.

6.5  The Agreement as Confidential . Except as expressly provided herein, each party agrees not to disclose any terms of this Agreement to any third party without the prior written consent of the other party; provided, however, that disclosures may be made (i) pursuant to applicable law, order or regulation of a governmental agency or a court of competent jurisdiction , (ii) in confidence, to actual or prospective investors , (iii) in confidence, to actual or prospective corporate and business partners, or (iv)  to DELIATROPH ’ S or UCHC’s accountants, attorneys, and other professional advisors.

7.     PATENT PROSECUTION

7.1   Responsibility for PATENT RIGHTS . UCHC, at its own expense, shall maintain all of the PATENT RIGHTS in the United States during the TERM. With respect to each patent within the PATENT RIGHTS, UCHC shall (a)  notify DELIATROPH of any interference, opposition, reexamination request, nullity proceeding, appeal or other interparty action, review it with DELIATROPH as reasonably requested, and receive and incorporate reasonable comments by DELIATROPH thereon; and (b) a reasonable time prior to abandoning such patents or otherwise taking or failing to take any action that would substantially affect the scope or validity of rights under such patent applications or patents, pr ovide DELIATROPH with reasonable prior written notice of such intended abandonment or decline of responsibility to maintain the relevant PATENT RIGHTS, and DELIATROPH shall have the opportunity to assume such financial obligation.

 
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7.2   Patent Applications . UCHC represents that to the best of its knowledge there are no pending patent applications, or patent applications that have been abandoned but retain the ability to be revived, that contain claims enabled and supported by the written description in the disclosure in a parent application for a patent contained within the PATENT RIGHTS.

8.     INFRINGEMENT

8.1  Notification of Infringement . Each party agrees to provide written notice to the other party promptly after becoming aware of any infringement of the PATENT RIGHTS.

8.2   DELIATROPH’S Right to Prosecute and Protect PATENT RIGHTS. DELIATROPH shall have the right but not the obligation, at its own expense, to protect the PATENT RIGHTS from infringement and prosecute infringers when, in its judgment, such action may be reasonably necessary, proper and justified, in the name of UCHC, DELIATROPH or both as may be required by law. If a declaratory judgment action alleging invalidity, unenforceability or noninfringement of any of the PATENT RIGHTS is brought against DELIATROPH and/or UCHC, DELIATROPH may elect to have sole control of the action, and if DELIATROPH so elects, it shall bear all the costs of the action. So long as DELIATROPH remains the exclusive licensee of the PATENT RIGHTS in the FIELD in the TERRITORY, DELIATROPH shall have the sole right to sublicense any alleg ed infringer in the FIELD in the TERRITORY for future use of the PATENT RIGHTS in accordance with the terms and conditions of this Agreement relating to sublicenses. Revenues to DELAITROPH pursuant to such sublicense shall be treated as set forth in Article 3.

8.3  Notice of Infringement by UCHC . If UCHC supplies DELIATROPH with evidence of infringement of the PATENT RIGHTS, UCHC may, by notice, request DELIATROPH to take steps to enforce the PATENT RIGHTS. If UCHC does so, and DELIATROPH does not, within ninety (90) days following the receipt of such notice, either (i) cause the infringement to terminate, or (ii) initiate a legal action against the infringer, UCHC may, upon notice to DELIATROPH, take the actions it deems necessary, proper and justified to protect the PATENT RIGHTS, in accordance with DELIATROPH’s rights under this Agreement, including initiating an action against the infringer at UCHC’ s expense, in the name of UCHC, DELAITROPH or both as may be required by law .

8.4   Cooperation . In the event one party institutes or carries on a legal action pursuant to this Article 8, the other party shall fully cooperate with and supply all assistance reasonably requested by the party instituting or carrying on such action, including by using commercially reasonable efforts to have its employees testify when requested and to make available relevant records, papers, information, samples, specimens, and the like. A party controlling an action pursuant to this Article 8 shall bear the reasonable out-of-pocket expenses incurred by said other party in providing such assistance and cooperation as is requested pursuant to this Section 8.4. A party instituting or carrying on such an action shall keep the other party informed of the progress of such action, and said other party shall be entitled to be represented by counsel in connection with such action at its own expense.

8.5   Settling or Abandoning Actions. The party controlling any action referred to in this Article 8 shall have the right to settle any claims, but only upon terms and conditions that are reasonably acceptable and agreed to in writing by the other party. Should the party controlling the action elect to abandon such an action other than pursuant to a settlement with the alleged infringer that is reasonably acceptable to the other party, the party controlling the action, shall give timely notice to the other party who, if it so desires, may continue the action; provided, however, that the sharing of expenses and any recovery in such suit shall be as agreed upon between the parties.

 
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8.6   Allocation of Payments. Any amounts paid to a party by third parties as the result of any action contemplated in this Section 8 shall first be applied to reimbursement of the documented unreimbursed out-of-pocket expenses (including attorneys’ fees and expert fees) incurred by each party. Any remainder shall be divided between the parties as follows:

(a)  To the extent the amount recovered reflects lost royalties or percentage of SUBLICENSE INCOME to UCHC, DELIATROPH shall pay UCHC the lost royalties or percentage of SUBLICENSE INCOME that would have been due UCHC if NET SALES of LICENSED PRODUCT had been made by DELIATROPH, an AFFILIATE or a SUBLICENSEE , as the case may be, and DELIATROPH shall retain the remainder.

(b)  To the extent the amount recovered does not reflect lost royalties or the percentage of SUBLICENSE INCOME otherwise due UCHC, such recovery shall be retained by the party who brought or defended the action, and who also paid the costs of such action.

9.     INDEMNIFICATION AND INSURANCE .

9.1   Indemnification .

(a)  Indemnity . DELIATROPH shall indemnify, defend, and hold harmless UCHC and its trustees, officers, faculty, students, employees, and agents and their respective successors, heirs and assigns (the "Indemnitees"), against any liability, damage, loss, or expense (including reasonable attorneys fees and expenses) incurred by or imposed upon any of the Indemnitees to the extent arising from any third party claims, suits, actions, demands or judgments arising out of any theory of liability (including without limitation actions in the form of tort, warranty, or strict liability and regardless of whether such action has any factual basis) concerning any product, process, or service that is made, used, sold, imported, or performed pursuant to any right or license granted under this Agreement.

(b)  Procedures . The Indemnitees shall provide DELIATROPH with prompt written notice of any claim, suit, action, demand, or judgment for which indemnification is sought under this Agreement. DELIATROPH shall , at its own expense, provide attorneys reasonably acceptable to UCHC to defend against any such claim. The Indemnitees shall cooperate fully with DELIATROPH in such defense and DELIATROPH shall have the right to conduct and control such defense and the disposition of such claim, suit, or acti on (including all decisions relative to litigation, appeal, and settlement); provided, however, that any Indemnitee shall have the right to retain its own counsel, at its own expense, if representation of such Indemnitee by the counsel retained by DELIATROPH would be inappropriate because of actual or potential differences in the interests of such Indemnitee and any other party represented by such counsel. DELIATROPH shall keep UCHC informed of the progress in the defense and disposition of such claim and to consult with UCHC with regard to any proposed settlement.

 
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9.2   Insurance . DELIATROPH shall obtain and carry in full force and effect commercial general liability insurance, and at the time of commercialization of a LICENSED PRODUCT, product liability and errors and omissions insurance which shall protect DELIATROPH and Indemnitees with respect to events covered by Section 9.1(a) above. Such insurance (i) shall be issued by an insurer licensed to practice in the State of Connecticut or an insurer pre-approved by UCHC, such approval not to be unreasonably withheld, (ii) shall list UCHC as an additional insured thereunder, (iii) shall be endorsed to include liability coverage, and (iv) shall require thirty (30) days written notice to be given to UCHC prior to any cancellation o r material change thereof. The limits of such insurance shall not be less than One Million Dollars ($1,000,000) per occurrence with an aggregate of Three Million Dollars ($3,000,000) for bodily injury including death; One Million Dollars ($1,000,000) per occurrence with an aggregate of Three Million Dollars ($3,000,000) for property damage; and One Million Dollars ($1,000,000) per occurrence with an aggregate of Three Million Dollars ($3,000,000) for errors and omissions. In the alternative, DELIATROPH may self-insure subject to prior approval of UCHC. DELIATROPH shall provide UCHC with Certificates of Insurance evidencing compliance with this Section. DELIATROPH shall continue to maintain such insurance or self-insurance after the expiration or termination of this Agreement during any period in which DELIATROPH or any AFFILIATE continues to make, use, or sell a product that was a LICENSED PRODUCT under this Agreement for a period of five (5) years.

9.3  In the event of monetary loss resulting from acts of omission or commission by UCHC or its employees in connection with the Agreement, DELIATROPH shall have recourse through the Connecticut Claims Commission as provided under Chapter 53 of the Statutes of the State of Connecticut in which all claims for monetary relief against the State of Connecticut and the University of Connecticut shall be filed with the State of Connecticut Claims Commissioner.

10.     NO REPRESENTATIONS OR WARRANTIES .

10.1   EXCEPT AS MAY OTHERWISE BE EXPRESSLY SET FORTH IN THIS AGREEMENT, UCHC MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND CONCERNING THE PATENT RIGHTS, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT, VALIDITY OF PATENT RIGHTS CLAIMS, WHETHER ISSUED OR PENDING, AND THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE. Specifically, and not to limit the foregoing, UCHC makes no warranty or representation (i) regarding the validity or scope of the PATENT RIGHTS, and (ii) that the exploitation of the PATENT RIGHTS or any LICENSED PRODUCT will not infringe any patents or other intellectual property rights of a third party.

10.2  IN NO EVENT SHALL EITHER PARTY , ITS TRUSTEES, DIRECTORS, OFFICERS, EMPLOYEES AND AFFILIATES BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING ECONOMIC DAMAGES OR INJURY TO PROPERTY AND LOST PROFITS, REGARDLESS OF WHETHER SUCH PARTY SHALL BE ADVISED, SHALL HAVE OTHER REASON TO KNOW, OR IN FACT SHALL KNOW OF THE POSSIBILITY OF THE FOREGOING.

 
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11.     TERMINATION.

11.1   Voluntary Termination by DELIATROPH . DELIATROPH shall have the right to terminate this Agreement, for any reason, (i) upon at least thirty (30) days prior written notice to UCHC, such notice to state the date at least thirty (30) days in the future upon which termination is to be effective, and (ii) upon payment of all amounts due to UCHC through such termination date.

11.2   Cessation of Business . If DELIATROPH ceases to conduct business, UCHC shall have the right to terminate this Agreement immediately upon written notice to DELIATROPH.

11.3  Termination for Default .

(a)   Nonpayment . In the event DELIATROPH fails to pay any amounts due and payable to UCHC hereunder, and fails to make such payments within thirty (30) days after receiving written notice of such failure, UCHC may terminate this Agreement immediately upon written notice to DELIATROPH.

(b)   Material Breach . In the event DELIATROPH commits a breach of a material obligation under this Agreement, except for breach as described in Section 11.3(a), and fails to cure that breach within ninety (90) days after receiving written notice thereof, UCHC may terminate this Agreement immediately upon written notice to DELIATROPH.

11.4   Effect of Termination .

(a)   Survival . The following provisions shall survive the expiration or termination of this Agreement: Articles 1, 6, 9, 10, 11 and 12, and Sections 5.1, 5.2, and 5.3.

(b)   Inventory . Upon the early termination of this Agreement, DELIATROPH and its AFFILIATES may complete and sell any work-in-progress and inventory of LICENSED PRODUCTS that exist as of the date of termination, provided that (i) DELIATROPH pays UCHC the applicable running royalty or other amounts due on such sales of LICENSED PRODUCTS in accordance with the terms and conditions of this Agreement, and (ii) DELIATROPH and its AFFILIATES shall complete and sell all work-in-progress and inventory of LICENSED PRODUCTS within six (6) months after the date of termination.

(c)   Pre-termination Obligations . In no event shall termination of this Agreement release DELIATROPH and AFFILIATES from the obligation to pay any amounts that became due on or before the date of termination.

(d)   Post-termination Obligations . If UCHC terminates this Agreement pursuant to Section 11.3(a) or 11.3(b) , all rights to the PATENT RIGHTS shall revert back to UCHC and UCHC shall receive the right of first negotiation to obtain on commercially reasonable terms a license from DELIATROPH to commercialize products comprising modifications, corrections, additions, extensions, upgrades, variations, or enhancement s to the extent resulting from data and information directly arising from the research, development, manufacture and use of the PATENT RIGHTS by DELIATROPH.

 
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12.     DISPUTE RESOLUTION

12.1  Dispute . In the event of any dispute, controversy or claim arising out of or relating to this Agreement or any subsequent amendments to this Agreement including, without limitation, the breach, termination, validity or invalidity thereof, or any non-contractual issues relating to this Agreement (each, a “Dispute”), each of the parties will appoint a designated officer to meet for the purpose of endeavoring to resolve such Dispute or to negotiate for an adjustment to such provision. No formal proceedings for the judicial resolution of such Dispute, except for the seeking of temporary restraining orders or injunctions, may begin until this dispute resolution procedure has been elevated to the President, in the case of DELIATROPH, and the Vice President of Research Administration, in the case of UCHC, and either of such officers of UCHC or DELIATROPH in good faith conclude, after a good faith attempt to resolve the Dispute, that amicable resolution through continued negotiation of the matter at issue does not appear likely. Such attempt to resolve the dispute may be accomplished by conference between such officers of DELIATROPH and UCHC, either face-to-face or by telephone, or by the exchange of correspondence.

12.2  Mediation . If the parties are unable to reach a solution by negotiation within a period of sixty (60) days, the parties agree to try in good faith to settle the Dispute by mediation administered by the American Arbitration Association under its Commercial Mediation Rules (the “Rules”), or another administrative entity mutually agreed to by the parties. Neither party may submit such Dispute to litigation in a court of law without first completing mediation.

12.3   Statute of Limitations . Except as otherwise determined by the mediator under Section 12.2, any statute of limitations will be tolled upon initiation of the dispute resolution procedures under this Article 12 and will remain tolled until the Dispute is resolved in accordance herewith; provided, however, that tolling will cease if the party against which the statute of limitations would be applied fails to observe the procedures set forth in this Article 12, except for the seeking of temporary restraining orders or injunctions.

12.4   Mandatory Procedures . The parties agree that any dispute arising out of or relating to this Agreement shall be resolved solely by means of the procedures set forth in this Article, and that such procedures constitute legally binding obligations that are an essential provision of this Agreement. If either party fails to observe the procedures of this Article 12, as may be modified by their written agreement, the other party may bring an action for specific performance of these procedures in any court of competent jurisdiction. Notwithstanding the foregoing, either party shall have the right, without waiving any right or remedy available to such party under this Agreement or otherwise, to seek and obtain from any court of competent jurisdiction any interim or provisional re lief that is necessary or desirable to protect the rights or property of such party, pending the mediation hereunder or the resolution of any dispute, controversy or claim hereunder.

12.5 Performance to Continue. Each party shall continue to perform its undisputed obligations under this Agreement pending final resolution of any dispute arising out of or relating to this Agreement; provided, however, that a party may suspend performance of its undisputed obligations during any period in which the other party fails or refuses to perform its undisputed obligations. Nothing in this Article is intended to relieve DELIATROPH from its obligation to make undisputed payments pursuant to Article 3 of this Agreement.

 
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13.     MISCELLANEOUS

13.1  Assignment . This Agreement is personal to DELIATROPH and no rights or obligations may be assigned by DELIATROPH without the prior written consent of UCHC, which consent shall not be unreasonably withheld, provided, however, that DELIATROPH may assign or transfer the Agreement in connection with the sale of all or substantially all of its assets or in the event of its merger, consolidation, change in control or similar transaction . This Agreement is not assignable by UCHC without the prior written consent of DELIATROPH, which consent shall not be unreasonably withheld. Any such permitted assignee shall succeed to all of the rights and obligations of UCHC under this Agreement.

13.2   Compliance with Laws . DELIATROPH shall use commercially reasonable efforts to comply with all commercially material local, state, federal, and international laws and regulations relating to the development, manufacture, use, and sale of LICENSED PRODUCTS.

13.3   Export Control . DELIATROPH and its AFFILIATES shall comply with all United States laws and regulations controlling the export of certain commodities and technical data, including without limitation all Export Administration Regulations of the United States Department of Commerce. Among other things, these laws and regulations prohibit or require a license for the export of certain types of commodities and technical data to specified countries. DELIATROPH hereby gives written assurance that it will comply with, and will cause its AFFILIATES to comply with, all United States export control laws and regulations, that it bears sole responsibility for any violation of such laws and regulations by itself or its AFFILIATES, and that it will indemnify, defend, and hold UCHC harmless (in accordance with Section 9.1) for the consequences of any such violation.

13.4   Non-Use of UCHC Name . Except as required by applicable law, order or regulation of a governmental agency or a court of competent jurisdiction, DELIATROPH and its AFFILIATES shall not use the name of the "University of Connecticut Health Center," or any variation, adaptation, or abbreviation thereof, or of any of its trustees, officers, faculty, students, employees, or agents, or any trademark owned by UCHC, or any terms of this Agreement in any promotional material or other public announcement or disclosure without the prior written consent of UCHC. The foregoing notwithstanding, without the consent of UCHC, DELIATROPH may state that it is licensed by UCHC under one or more of the patents an d/or patent applications comprising the PATENT RIGHTS.

13.5   Marking of LICENSED PRODUCTS . To the extent commercially feasible and consistent with prevailing business practices, DELIATROPH shall mark, and shall cause its AFFILIATES to mark, all LICENSED PRODUCTS that are manufactured or sold under this Agreement with the number of each issued patent under the PATENT RIGHTS that applies to such LICENSED PRODUCT.

13.6   Notice . Any notices required or permitted under this Agreement shall be in writing, shall specifically refer to this Agreement, and shall be sent by hand, recognized national overnight courier, or registered or certified mail, postage prepaid, return receipt requested, to the following addresses of the parties:

 
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If to UCHC:
                         University of Connecticut Health Center
                    c/o the Center for Science and Technology Commercialization
       263 Farmington Avenue                    
       Farmington, CT 06030-6207                    
        Attention: Executive Director                    
 
If to DELIATROPH:    
            DeliaTroph Pharmaceuticals, Inc.
                        11588 Sorrento Valley Road
            Suite 16
            San Diego, CA 92121
                        Attention: President

With a copy to:
          Gray Cary Ware & Freidenrich LLP
          4365 Executive Drive
          Suite 1100
          San Diego, CA 92121-2133
                      Attention: Mark Wicker

All notices under this Agreement shall be dee med effective upon receipt. A party may change its contact information immediately upon written notice to the other party in the manner provided in this Section.

13.7   Governing Law . This Agreement and all disputes arising out of or related to this Agreement, or the performance, enforcement, breach or termination hereof, and any remedies relating thereto, shall be construed, governed, interpreted and applied in accordance with the laws of the State of Connecticut, U.S.A., without regard to conflict of laws principles, except that questions affecting the construction and effect of any patent shall be determined by the law of the country in which the patent shall have been granted.

13.8   Force Majeure . Neither party will be responsible for delays resulting from causes beyond the reasonable control of such party, including without limitation fire, explosion, flood, war, strike, or riot, provided that the nonperforming party uses commercially reasonable efforts to avoid or remove such causes of nonperformance and continues performance under this Agreement with reasonable dispatch whenever such causes are removed.

13.9   Amendment and Waiver . This Agreement may be amended, supplemented, or otherwise modified only by means of a written instrument signed by both parties. Any waiver of any rights or failure to act in a specific instance shall relate only to such instance and shall not be construed as an agreement to waive any rights or fail to act in any other instance, whether or not similar.

13.10   Severability . In the event that any provision of this Agreement shall be held invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect any other provision of this Agreement, and the parties shall negotiate in good faith to modify the Agreement to preserve (to the extent possible) their original intent. If the parties fail to reach a modified agreement within thirty (30) days after the relevant provision is held invalid or unenforceable, then the dispute shall be resolved in accordance with the procedures set forth in Article 12. While the dispute is pending resolution, this Agreement shall be construed as if such provision were deleted by agreement of the parties.

 
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13.11   Binding Effect . This Agreement shall be binding upon and inure to the benefit of the parties and their respective permitted successors and assigns.

13.12   Headings . All headings are for convenience only and shall not affect the meaning of any provision of this Agreement.

13.13  Entire Agreement . This Agreement constitutes the entire agreement between the parties with respect to its subject matter and supersedes all prior representations, agreements and understandings , oral or written, between the parties relating to its subject matter.

13.14  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.

 
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives.



UNIVERSITY OF CONNECTICUT                                           DELIATROPH PHARMACEUTICALS,  INC.
HEALTH CENTER                                                           
 
By:        /s/ Michael F. Newborg                       By:   /s/ Gregory Frost                          
Name: Michael F. Newborg                                           Name:  Gregory Frost                        
Title:   Executive Director, Center for Science                            Title:   Vice President                            
            and Technology Commercialization     
Date:    12/1/02                                                                              Date:    11/25/02                                     




 
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Exhibit 10.2
CONFIDENTIAL TREATMENT REQUESTED – EDITED COPY


AGREEMENT FOR SERVICES

This AGREEMENT FOR SERVICES is made this __ day of November, 2003 (the “Effective Date”) by and between Avid Bioservices, Inc., a Delaware corporation, (hereinafter referred to as “AVID”), having its principal office at 14282 Franklin Avenue, Tustin, CA 92780, USA and Hyalozyme Therapeutics, Inc, a California corporation, (hereinafter referred to as "COMPANY"), having its principal office at 11588 Sorrento Valley Road, Suite-17, San Diego, CA 92121, USA.

1.   DEFINITIONS
 
    In this Agreement:

(a)  "Act" means the current good manufacturing practices and general biological standards as promulgated under the United States Federal Food, Drug, and Cosmetic Act at 21 C.F.R. et seq. , as the same may be amended from time to time.

(b)  "Affiliate" means, with respect to either Party, any corporation or other business entity controlled by, controlling, or under common control with, such Party. For this purpose, "control" shall mean direct or indirect beneficial ownership of at least fifty percent (50%) of the voting stock or income interest in such corporation or other business entity, or such other relationship as, in fact, constitutes actual control.

(c)   "Agreement" means this Agreement for Services together with the Proposal for Development as the same may be amended as provided herein from time to time as well as the Material Transfer Agreement of November 12, 2003, (the “MTA”) that the Parties have entered into with respect to the materials to be provided in connection with production of the Product hereunder.

(d)  “AVID Know-How” shall mean all technical and other information owned or controlled by AVID, which relate to the services provided by AVID under this Agreement and is would be reasonably necessary by COMPANY or a third party to make Product.

(e)  “AVID Patent Rights” shall mean all U.S. and foreign patents, patent applications, provisional patent applications, certificates of invention and applications therefore, divisions, continuations or continuations-in-part, or continuing prosecution applications, together with any extensions, registrations, confirmations, reissues, re-examinations, renewals or supplementary protection certificates and other forms of government-issued patent protection directed to the inventions claimed in the foregoing owned or controlled by AVID, which relate to the services provided by AVID under this Agreement and the claims of which would necessarily be infringed by making Product.

(f)   “AVID Property” means any intellectual property or other property or process (i)  owned or possessed by AVID as of the date hereof or (ii)  later made, acquired or developed by AVID during the term of this Agreement, in each case that does not relate to making, using or selling the Product, including but not limited to AVID’s Confidential Information.

 
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(g)  "AVID SOPs" means AVID's standard operating procedures.

(h)   "CGMP" means current Good Manufacturing Practices as established by the FDA as the same may be amended from time to time.

(i)   "COMPANY Property" means any intellectual property or other property or process (i)  owned or possessed by COMPANY as of the date hereof , (ii)  later made, acquired or developed by COMPANY during the term of this Agreement, or (iii) that relates to the making, using or selling of the Product or is derived from materials provided by COMPANY to AVID, including , but not limited to, COMPANY’s Confidential Information and any materials provided to AVID in connection with this Agreement.

(j)   “Confidential Information” with respect to any Party includes, but is not limited to, any know-how, knowledge, technology, methods, formula, expertise, trade secrets, documents or information of any type or nature, tangible or intangible, either owned or possessed by that Party as of the date hereof or later made, learned, acquired, conceived or developed by that Party during the term of this Agreement including any applications for licensing, patenting or copyrighting any of the foregoing.

(k)  “Derived” or “derived” shall mean obtained, developed, created, synthesized, designed, derived or resulting from, based upon or otherwise generated (whether directly or indirectly, or in whole or in part).

(l)  "FDA" means the United States Food and Drug Administration or its successor .

(m)  "Invention" means any invention, improvement, or discovery which arises out of work performed by AVID , in whole or in part, in connection with the Project.

(n) “Manufacturing Instructions” means the batch production records and all amendments thereto for manufacturing and storing of Product, as developed by AVID and agreed upon by COMPANY. The Manufacturing Instructions may be amended any time by mutual written consent.

(o)  “Milestone” means meeting the timelines provided.

(p)   "Party" means individually AVID or COMPANY and "Parties" means AVID and COMPANY together.

(q)   “Process Invention” means any Invention (other than a Product Invention) relating to manufacturing methods and processes developed in connection with the Project.

         (r)   "Product" means (i) the active pharmaceutical ingredient (API) for formulation in (A)  “OPTIPHASE™, ENHANZE™ Technology for Ophthalmic Anesthesia , and (B)  CUMULASE™ –IVF, For Separation of Cumulus Cells from Egg Cells prior to In Vitro Fertilization (IVF) Procedures” ; and (ii) any improvement, modification, progeny, part or discovery derived from the foregoing, in each case manufactured or developed by AVID , COMPANY or both in the course of the Project .

 
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(s)  “Product Invention” means any patentable improvement , discovery or invention related to the Product or its use, discovered directly or indirectly in connection with the performance of the Project.

(t)   "Project" means any discrete project described in the Proposal for Development.

(u)   "Project Data" means documentation, records, raw data, specimens, labeling, certificates, specifications, formulae, procedures, and other work product generated during any Project (including without limitation data relating to the process development, manufacture or testing of the Product ). Notwithstanding anything to the contrary in this Agreement, all Project Data (other than that regarding a Process Invention) shall be Confidential Information of COMPANY .

(v)   "Proposal for Development" means the proposal for development and/or production of the Product, which may include the Project Proposals, specific Project objectives, deliverables, milestones, specifications, estimated costs and payment terms, schedules and any special conditions/requirements that might apply to such Project, attached hereto as Exhibit A as the same may be amended from time to time.

(w)  “Quality Agreement” means the Quality Agreement, in the form attached as Exhibit C, which the COMPANY and AVID shall execute within a reasonable period of time after the execution of this Agreement, as amended, supplemented or restated from time to time by the parties in writing.

(x)   “Registrations” shall mean all registrations, permits, licenses, authorizations, approvals, presentations, notifications or filings (together with all applications therefor), which are filed with or granted by the FDA in the United States and with the governing health authority of any other country, and which are required to develop, make, use, sell, import or export the Product.

(y)  “Specifications” means the specifications for the Product attached hereto as Exhibit D, as the same may be amended from time to time.

2.   THE PROJECTS

(a)   Engagement of AVID. COMPANY hereby engages AVID, and AVID hereby agrees, to process, develop, produce and test the Product on behalf of COMPANY in accordance with the terms and subject to the conditions set forth herein.

(b)   Conduct of the Projects . AVID's responsibilities hereunder with respect to the Product shall consist of the performance of the services specified in the Proposal for Development, which shall constitute an integral part of this Agreement and is incorporated herein by reference. AVID shall not commence work on any Project in the Proposal for Development until authorized in advance and in writing by COMPANY by signing the Project Authorization attached hereto as Exhibit  B. After COMPANY has signed a Project Authorization for a Project, AVID shall perform its obligations with respect to such Project in accordance with the scope of the Project as set forth in the Proposal for Development and this Agreement , provided that COMPANY is not in default under this Agreement. The Parties acknowledge that, as the Project progresses, the Parties may wish to optimize, augment, delete, or otherwise amend parameters and procedures currently set forth in the Proposal for Development. Such amendments shall be effective only if adopted in the manner set forth in Section 12(e) of this Agreement or by the Parties signing a revised Project Authorization.

 
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(c)   Compensation. In consideration of the performance of AVID’s obligations with respect to a Project, COMPANY shall pay AVID in accordance with the terms set forth in the Proposal for Development for such Project as expressly provided on a Project Authorization signed by COMPANY and AVID. Except for the foregoing, COMPANY shall have no other payment or compensation obligations to AVID hereunder except as provide for under Section 11. COMPANY shall be entitled to deduct the amount of any withholding taxes, value-added taxes or other taxes, levies or charges with respect to such amounts, other than United States taxes, payable by COMPANY, or any taxes required to be withheld by COMPANY, to the extent COMPANY pays to the appropriate governmental authority on behalf of AVID such taxes, levies or charges. COMPANY shall use reasonable efforts to minimize any such taxes, levies or charges required to be withheld on behalf of AVID by COMPANY . Payment of invoices must be made within thirty (30) days of the date of invoice, unless as otherwise specifically noted in this Agreement or the Proposal for Development. If COMPANY defaults on payments due, interest shall accrue on any amount overdue at the rate of one percent (1%) per month or the maximum rate allowed by law, whichever is lower, and AVID shall be entitled to suspend the associated provisions of the services hereunder by notice in writing to COMPANY.

(d)   Project Managers. AVID and COMPANY shall each assign a dedicated Project Manager to the Projects as set forth in the Proposal for Development. AVID's Project Manager shall be responsible for the overall timeliness and integrity of the Projects and shall communicate with, and provide a written status report (by fax or by e-mail) to, COMPANY's Project Manager, on at least a bi-monthly basis, or more frequently if necessary, on all matters pertinent to the Projects . Additional AVID personnel responsible for different components of a Project shall be identified in the Proposal for Development. Subject to the provision of this Agreement, with respect to any dispute regarding AVID’s performance of the Projects, the Parties shall first attempt to resolve such dispute jointly by each Party's head of Quality or other authorized representatives authorized to sign on behalf on the Parties. The Project Managers may be changed at any time upon written notice to the other Party. The Project Managers for each Party shall be:

For AVID:          Mr. Scott Klee
            14282 Franklin Avenue
            Tustin, CA 92780
            Direct: 714-508-6066
            Fax: 714-734-1694


For COMPANY:  Dr. Carolyn Rynard
                11588 Sorrento Valley Road, Suite 17
                San Diego, CA 92121
                                         858-794-8889
                858-259-2539
                                        gfrost@hyalozyme.com


 
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(e) Quality Agreement. The parties shall comply with the Quality Agreement.

(f)   Specifications. AVID shall manufacture all Product under this Agreement in conformity with the Specifications and in accordance with all applicable laws and regulations in the United States and the European Union, provided that COMPANY advises AVID at least ninety (90) days prior to manufacturing if the planned use is the European Union. If AVID is requested by COMPANY to manufacture Product for use outside the United States and European Union, AVID and COMPANY will enter into a separate agreement in good faith to explore the applicable laws and regulations of each country.

(g)  cGMP. AVID shall manufacture all Product under this Agreement in accordance with GMP and in compliance to all worldwide regulatory filings. AVID shall promptly advise COMPANY of any proposed process changes outside the filed process, which changes must be approved by COMPANY prior to their implementation by AVID. AVID shall promptly advise COMPANY of any process changes outside the filed process experienced by AVID during the manufacture of the Product and must request COMPANY’s approval prior to release of such Product. Such approvals shall not be unreasonably withheld or delayed by COMPANY. COMPANY shall have the right, at its sole expense, to audit AVID for compliance with cGMPs upon reasonable notice during normal business hours.

(h)   Raw Materials. The parties acknowledge and agree that the costs reflected in the Proposal for Development are inclusive of all raw materials and components necessary for the manufacture of Product, unless specifically noted in the Proposal for Development. Upon expiration or termination of this Agreement for any reason, AVID shall provide to COMPANY all remaining raw materials or components (i) that were purchased by AVID for use under a Project and (ii) that COMPANY has made the associated payments to AVID for such Project.

(i)   Acceptance of Product and Deviations. AVID will provide COMPANY with a test sample, Certificate of Analysis and Manufacturing Instructions required for COMPANY to determine if Product meets Specifications. COMPANY will examine such information for compliance with the Specifications and Manufacturing Instructions. COMPANY may reject a Product lot if the lot does not meet Specifications, provided that such deviation is a fault of AVID and further provided that COMPANY and AVID have agreed upon and approved the Manufacturing Instructions prior to the commencement of cGMP manufacturing of the lot.

If AVID wants to deviate from the Manufacturing Instructions, AVID shall inform COMPANY’s Project Manager – if time restraints do not oppose in writing, by facsimile or at least by e-mail – about the planned change before it is implemented. In any case, any change in the process which might have an impact on compliance with cGMP and/or the Manufacturing Instructions and/or the Product meeting the Specifications is deemed to be a material deviation which must be reported to COMPANY’s Project Manager.

AVID shall only be entitled to implement such material deviations after the prior consent of COMPANY which can be given or withheld in COMPANY’s sole and unrestricted discretion, in writing.

                 Should any unforeseen and unwanted material deviations occur, AVID shall inform COMPANY and the Project Manager of COMPANY by telephone, fax or e-mail promptly and without undue delay. During cGMP manufacturing, such unplanned and unwanted material deviations must be communicated to COMPANY’s Project Manager preferably within 24 hours, but in any event within 72 hours at the latest. Such deviations shall be documented and processed according to AVID's relevant Manufacturing Instructions. The deviations can be formally investigated by COMPANY’s Project Team which shall have for this purpose appropriate access to the site and all Product related Manufacturing Instructions and other relevant Product-related quality documents.

 
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(j)  Delivery of Product. AVID shall deliver the Product as directed by COMPANY within two weeks from the date the Product is ready for shipment in accordance with the Proposal for Development. If Product is not shipped within the said two weeks due to a request or delay by COMPANY, COMPANY shall accept all risk and responsibility for the Product on the date that is two weeks from the issuance date of the certificate of analysis and COMPANY shall provide AVID with a fixed delivery schedule of the Product within such two week period. AVID shall provide certificates of analysis to COMPANY for all Product manufactured and supplied hereunder based upon the agreed upon Specifications . Risk of loss for the Product shall pass to COMPANY at the time the Product is passed to a common carrier selected by COMPANY if Product is shipped within two weeks of the date the Product is ready for shipment in accordance with the Proposal for Development. Transportation of the Product, whether or not under any arrangements made by AVID on behalf of COMPANY, shall be made at the sole cost and expense of COMPANY and COMPANY shall inform AVID in advance of the dollar value of any available insurance to be added to the shipment at COMPANY’s sole cost and expense. Unless otherwise agreed, AVID shall package the Product for delivery in accordance with COMPANY’s shipping instructions provided to AVID in writing . It shall be the responsibility of COMPANY to inform AVID in writing in advance of any special packaging or shipping conditions of the Product and any labeling requirements for the Product. All additional costs and expenses of whatever nature incurred by AVID in complying with such special requirements shall be paid by COMPANY. In addition, COMPANY shall be solely responsible for all import or export permissions for the Product outside the USA.

(k)   If there is subsequently found to be a defect in the Product that could not have been found by adequate examination by COMPANY, a “Hidden Defect”, AVID and COMPANY will agree upon terms for remedy having due regard to where responsibility for the defect lies.

(l)   Adverse Experiences. Each party shall promptly advise the other of any safety or toxicity problem of which either party becomes aware regarding the Product.

(m)  Custody of COMPANY Property. All COMPANY Property shall be the sole and exclusive property of COMPANY. In connection with this Agreement, the Parties agree that AVID will have custody over certain COMPANY Property. It is understood that such COMPANY Property is held in trust by AVID for COMPANY, and that all such materials will be clearly labeled as belonging to COMPANY, and that AVID shall bear the risk of loss for any COMPANY Property during the time that such COMPANY Property is in the possession of AVID. Risk of loss for the COMPANY Property shall pass to COMPANY in accordance with the Product delivery provisions of Section 2(j) above. Title to COMPANY Property shall at all times remain in COMPANY or its assigns and AVID shall not pledge to any third party a security or other interest in the COMPANY Property, nor shall AVID allow the COMPANY Property to be otherwise encumbered in any manner .

 
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If reasonably necessary, and unless the Parties mutually agree upon an extended period of storage, AVID will, at no cost, retain and store COMPANY Property (excluding Shakedown runs and cGMP manufacturing as described in the Proposal for Development) including without limitation (i)  dedicated equipment, raw materials and cell banks after the Projects are completed for no longer than three months from completion of the last Project and (ii) retained samples for no longer than twelve months from completion of the last Project . Notwithstanding the foregoing, AVID shall maintain required retention samples (certain bio-hazardous and unsafe materials shall be excluded from this requirement) on hand at no cost to COMPANY in accordance with the rules and regulations of the FDA. Thereafter, COMPANY may request , at COMPANY’s sole cost and expense , contracted storage arrangements from AVID on AVID’s customary terms and conditions for such storage . COMPANY Property shall be delivered to COMPANY at the sole cost and expense of COMPANY in accordance with the Product delivery provisions of Section 2(j) above. Except as is specifically permitted under Section 7, AVID shall not use any COMPANY Property for any purpose other than performing its obligations under this Agreement.

(n)  AVID Property. All AVID Property shall be the sole and exclusive property of AVID.

(o)   Dispute Resolution. In the event that any dispute with respect to whether the Product fails to conform to the Specifications is not resolved pursuant to the terms of Section 2(d) above, a sample of the Product delivered to COMPANY and a sample of the Product retained by AVID from the batch of the Product in question shall be exchanged between AVID and COMPANY for a counter-check. If such counter-check does not resolve the dispute, a sample of the Product delivered to COMPANY and a sample of the Product retained by AVID from the batch of the Product in question shall be submitted to an independent, qualified third party laboratory that is mutually acceptable and selected by the Parties promptly in good faith. Such laboratory shall determine whether the Product met the specifications under the Proposal for Development at the time of delivery by AVID to Company (as provided in Section 2(j) above), and such laboratory’s determinations shall be final and determinative for purposes of this Agreement, save for manifest error on the face of decision. The Party against whom the laboratory rules shall bear all costs of the third party laboratory activities.

(p)   In the event that any dispute with respect to whether the Product was manufactured in compliance with cGMP is not resolved pursuant to the terms of Section 2(d) above, such dispute shall be submitted to an independent, qualified third party expert that is mutually acceptable and selected by the Parties promptly in good faith. Such expert shall determine whether the Product was manufactured in compliance with cGMP, and such expert’s determinations shall be final and determinative for purposes of this Agreement, save for manifest error on the face of decision. The Party against whom the expert rules shall bear all costs of the expert’s activities.

(q)   Remedies.   If a batch of the Product does not conform to the Specifications , and this non-conformity is not due to AVID’s failure to comply with the Proposal for Development or the terms of this Agreement or CGMP, COMPANY shall pay any amounts due under the Project Authorization under which the batch was made. AVID shall, at COMPANY’s request and at COMPANY’s sole cost and expense, either obtain new raw materials and produce a new batch of the Product as soon as reasonably possible or investigate and reprocess or rework the batch.

 
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 If a batch of the Product does not conform to the Specifications and/or was not manufactured in accordance with applicable cGMPs, and this non-conformity is due to AVID’s failure to comply with the Proposal for Development or applicable cGMP s or the terms of this Agreement , as a result thereof making the Product unsuitable for its intended purpose, AVID shall, as the sole remedy for COMPANY and exclusive liability for AVID, upon consultation with COMPANY and at COMPANY’s option, either (i) refund any amounts paid by Company under for the Project Authorization under which the batch was made, (ii) obtain, at AVID’s cost and expense, new raw materials and produce a new batch of the Product as soon as reasonably possible, or (iii) rework, at AVID’s cost and expense, the Product in such a way that the batch can be deemed to have been manufactured according to the Specifications and cGMP.

Regardless of the remedy, in such case the Parties shall meet to discuss, evaluate and analyze the reasons for and the implications of the failure to comply with the Specifications or cGMP and shall discuss in good faith to decide whether to proceed with or to amend such Project, or to terminate such Project and/or this Agreement .

It is specifically agreed that any kind of non-conformity of the Product with the applicable specifications and/or cGMP shall not entitle COMPANY to withhold any payment due pursuant to the Proposal for Development or any Project Authorization with respect to such Product.

3.   REPRESENTATIONS AND WARRANTIES

(a)   AVID Representations and Warranties. AVID represents , warrants and covenants : (i) that it has the full power, right and authority to execute and deliver this Agreement and that it shall use commercially reasonable best efforts to perform its obligations hereunder; (ii) that it will assign to each Project professional personnel, qualified to perform the process procedures consistent with the technical requirements of such Project; (iii) that none of the AVID personnel to be assigned to a Project have or shall have been subject to debarment under the Generic Drug Enforcement Act or any other penalty or sanction by the FDA; (iv) that it will conduct each Project in conformity with applicable AVID SOPs, cGMP, all applicable FDA regulatory requirements, the procedures and parameters set forth in the Proposal for Development and this Agreement and generally accepted professional standards, unless not expressly required under the Proposal for Development; (v) that the Project Data will be prepared in accordance with AVID SOPs, cGMP, all applicable FDA regulatory requirements and the procedures and parameters set forth in the Proposal for Development, unless not expressly required under the Proposal for Development; and (vi) that, upon delivery of the Product as specified in Section 2(j) above and during such time as the Product was under AVID’s control, the Product will be in conformity with the Act and shall not be adulterated, misbranded, misused, contaminated, tampered with or otherwise altered, mishandled, or subjected to negligence.

Due to the developmental characteristics of the Product, the nature of the manufacture of biological products, and the fact that AVID neither owns nor developed the Product, AVID makes no representations, warranties or guarantees that (i) the Product will be suitable for any purpose of COMPANY, commercially exploitable, profitable or approved by any regulatory authority, (ii) a Milestone will be achieved, or (iii) unless explicitly agreed upon otherwise in this Agreement or the Proposal for Development , the Product will fulfill certain specifications or certain yields or will be delivered in time for any further use or clinical programs intended therefore by COMPANY.

 
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(b)  COMPANY Representations and Warranties. COMPANY represents and warrants (i) that it has the full power, right and authority to execute and deliver this Agreement; (ii) that it has legal title and/or a valid license to, including the right to transfer, the materials, data and any other COMPANY Property that COMPANY provides to AVID in connection with this Agreement and (iii) that , to the best of COMPANY’s knowledge, AVID’s use of such COMPANY Property or the materials provided under the MTA will not violate or infringe on the patents, trademarks, trade names, service marks, copyrights, trade secrets or any other intellectual property rights of any third party.

4.   REGULATORY APPROVALS ; RECALLS

(a)  Batch Records. AVID shall provide COMPANY copies of the batch production records used in the production and testing for all clinical batches of the Product manufactured by AVID for COMPANY in accordance with terms of the Project Proposal. AVID shall provide any additional information and documentation and otherwise cooperate as reasonably requested by COMPANY, at COMPANY's sole cost and expense, in support of any regulatory application related to the Product, which shall be filed by COMPANY with the appropriate regulatory agency at its sole cost and expense. Any such application related to the Product shall be the sole and exclusive property of COMPANY. If requested by COMPANY and at the sole cost and expense of COMPANY, AVID shall file any required amendments to such application to allow manufacturing of the Product in its facility.

(b)   Product Registration. COMPANY shall have the exclusive right, at is sole expense, to prepare, file, prosecute, seek and obtain all applicable Registrations for Products. AVID shall prepare and transmit to COMPANY a CMC section in a format acceptable to FDA on or before October 1, 2004. Each party shall reasonably cooperate with the other party (including without limitation, providing all reasonably necessary information in its possession, taking all reasonably necessary actions and executing all reasonably necessary instruments) in connection with the preparation, filing, prosecution, seeking and obtaining the Registrations.

(c)   Recalls. Each party promptly shall notify the other if any Product, device or drug product manufactured from Product, is alleged or proven to be the subject of a recall, market withdrawal or correction. COMPANY shall be responsible for coordinating any recall, market withdrawal or field correction of Product, and recall, market withdrawal or correction shall be conducted in accordance with the provisions of the Quality Agreement. COMPANY shall provide AVID with a copy of all documents relating to such recall, market withdrawal or field correction. AVID shall cooperate with COMPANY (including providing COMPANY with all data, information and documents requested by COMPANY) in connection with such recall, market withdrawal or field correction, at COMPANY’s expense. Unless such recall is caused solely by the negligence, omission or willful misconduct of AVID or solely by AVID’s breach of its warranties or obligations under this Agreement, or by a “Hidden Defect,” COMPANY shall be responsible for all of the costs and expenses of such recall, market withdrawal or field correction. In the event a recall, market withdrawal or field correction is necessary because both (i) AVID has delivered a non-conforming Product to COMPANY, and (ii) such non-conformity is due to the negligence, omission or willful misconduct of AVID, or solely by AVID’s breach of its warranties or obligations under this Agreement, AVID will bear all reasonable costs associated with (A) such recall, market withdrawal or field correction (including but not limited to costs associated with receiving and administering the recalled Product and notification of the recall to those persons whom COMPANY deems appropriate) and (B) replacement of such recalled Product.

 
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5.  RIGHT OF ACCESS
 
AVID agrees that all Project Data, equipment, and facilities relating to any Project shall be made available upon COMPANY's request with 14 days advance notice for inspection by COMPANY, its representatives, including authorized third party consultants, or the FDA, at any time commencing on the Effective Date and expiring on the later of (a)  six months after completion of the last Project, or (b)  as long as the Product is in use or undergoing clinical trials, provided that COMPANY notifies AVID on a yearly basis that the Product is still undergoing clinical trials, and provided further that any authorized third party consultant (i) shall execute a written confidentiality agreement in AVID’s favor on terms no less strict than those set forth herein and (ii) be subject to the prior approval of AVID, such approval not to be unreasonably withheld or delayed. COMPANY shall have the right to access the AVID facilities directly affecting the production of Product, and all applicable records (including inspections, 483s, etc.) related thereto, to oversee production of Product in accordance with the Quality Agreement and AVID’s standard visitation policy, provided that facility or other client projects are not unreasonably disrupted during the inspection. COMPANY shall have the right to render technical advice and direction to AVID regarding production of Product pursuant to a direct communication with the Project Manager, provided that such technical advice and direction does not modify the pre-approved Manufacturing Instructions. Any changes requested to modify the Manufacturing Instructions shall be in writing by COMPANY and COMPANY shall assume all responsibility for such requested changes unless such changes have implemented and tested during the development phase of the Project and prior to cGMP manufacturing. AVID promptly shall implement all reasonable advice and direction provided that such advice and direction is not inconsistent with each Project as set forth in the Proposal for Development, AVID SOPs, and cGMP. If COMPANY observes or discovers variances from established standards and methods of production of Product, COMPANY shall give written notice thereof to AVID, and upon receipt of any such notice, AVID promptly shall take all appropriate remedial or corrective action and give written notice to COMPANY describing in reasonable detail such actions taken. If AVID disagrees with any such advice and direction, the parties shall discuss in good faith an appropriate resolution . AVID will, within 3 business days following notification to AVID, inform COMPANY in the event of any FDA or other regulatory inspection relating to any Project and will immediately notify COMPANY in writing of any adverse event relating to a Project.

6.   SUBCONTRACTORS

(a)  Subcontractors. Unless to an Affiliate, AVID shall not assign, subcontract, or delegate any of its responsibilities under this Agreement without the prior written consent of COMPANY. AVID shall cause any such subcontractor, vendor or testing contractor to allow COMPANY, at COMPANY’s sole cost and expense , to audit and inspect such subcontractor, vendor or testing contractor , with whom AVID may enter into agreements in the performance of its obligations with respect to any Project . AVID shall coordinate the vendor audits for COMPANY and shall have the right to accompany COMPANY personnel on such audits. Any agreement between AVID and such subcontractor, vendor or testing contractor shall include provisions to maintain the confidentiality of COMPANY’s Confidential Information and provide COMPANY rights (including without limitation rights to COMPANY Property and Product Inventions) with respect to such subcontractors , vendors or testing contractors substantially similar to those set forth herein.

 
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(b)  Suppliers of Raw Materials. Prior to AVID using any vendor or supplier of any raw materials or components, such as media and columns, for the manufacture of Product under this Agreement, AVID shall notify COMPANY in writing of such vendor or supplier and COMPANY shall have the right for a period of not less than thirty (30) days to reject any such vendor or supplier, COMPANY understands that AVID shall not procure any raw materials or components until COMPANY provides AVID with written approval of the vendor or supplier. If COMPANY provides written notice to AVID of such rejection, AVID shall not use such vendor or supplier for the supply of such raw materials or components.

7.   INTELLECTUAL PROPERTY

(a)   Ownership of Inventions. At COMPANY's request, AVID shall assign to COMPANY all rights, title and interest to any Product Invention discovered by AVID employees exclusively as a result of performing under this Agreement; provided COMPANY requests such assignment, in writing, within one year of disclosure to it of such Product Invention; provided, further, that AVID shall retain all rights, title and interest to any Process Inventions discovered in connection with this Agreement. AVID shall grant to COMPANY a non-exclusive, non-transferable, royalty-free license to practice Process Inventions and to reproduce and use Project Data regarding such Process Inventions solely as required for COMPANY to manufacture and have manufactured the Product. If COMPANY requests and at COMPANY's sole cost and expense, AVID shall execute any and all applications, assignments or other instruments and give any testimony necessary to apply for and obtain patents in the United States or any foreign country with respect to the Product or a Product Invention, and COMPANY shall reasonably compensate AVID for the time devoted to such activities and any out-of-pocket expenses.

(b)   Project Data. All Project Data relating to the Product shall be the sole and exclusive property of COMPANY. All Project Data regarding any Process Invention shall be the sole and exclusive property of AVID. In addition, COMPANY hereby grants to AVID a non-exclusive royalty-free license to use any validation and process parameter data generated in generic reports comparing varied types and classes of products , in each case provided that such data do not directly or indirectly identify the Product (or API therein) or the name of COMPANY and provided that such data are not used for products competitive with COMPANY’s products. Upon either the request of COMPANY or completion of the last Project, AVID shall send to COMPANY copies of all Project Data. The Project Data shall be prepared, documented and communicated in a manner consistent with the specifications described in the Proposal for Development.

(c)   No Implied Right or License. Except as otherwise provided in this Agreement, under no circumstances shall a party, as a result of this Agreement, obtain any ownership interest or other right in any invention, discovery, composition or other technology, or in any patent right or other intellectual property right, of the other party (including without limitation those owned, controlled or developed by the other party at any time pursuant to this Agreement).

 
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8.   CONFIDENTIALITY

(a)   Confidential Information. Each Party agrees that the disclosing Party has and shall retain sole and exclusive rights of ownership in all Confidential Information disclosed by such Party. The receiving Party agrees that it will not use any Confidential Information received from the disclosing Party except for the purposes of performing under this Agreement, unless otherwise specified in this Agreement. The receiving Party agrees not to disclose any Confidential Information received from the disclosing Party to any third party without the prior written consent of the disclosing Party, unless such disclosure is required by regulatory agencies, including, but not limited to, the FDA and the Securities and Exchange Commission or is required by law or regulation to be disclosed, provided that the receiving Party has provided prompt, advance written notice to the disclosing Party so as to enable the disclosing Party to seek a protective order or otherwise prevent disclosure of such Confidential Information . Each Party agrees to maintain and follow reasonable procedures to prevent unauthorized disclosure or use of the other Party’s Confidential Information and to prevent it from becoming disclosed or being accessed by unauthorized persons. Each Party agrees that it may disclose to its employees only such Confidential Information received from the disclosing Party as is necessary to each such employee’s responsibilities in performing under this Agreement. The receiving Party shall immediately advise the disclosing Party of any disclosure, loss, or use of Confidential Information received from the other Party in violation of this Agreement. The Parties agree that all Confidential Information of COMPANY, whether in written, graphic, or other tangible form, shall be returned to COMPANY upon written request at the termination of this Agreement. A single archival copy may be retained by AVID solely to meet FDA regulatory requirements and as otherwise required by applicable law or regulation.

(b)   Exclusions. Confidential Information shall not include information that: (1) is now or subsequently becomes generally available to the public through no wrongful act or omission of the receiving Party; (2) the receiving Party can demonstrate in its written records to have had lawfully in its possession prior to disclosure to it by the disclosing Party; (3) is independently developed by the receiving Party without use, directly or indirectly, of any Confidential Information received from the disclosing Party as evidenced by its written records; or (4) the receiving Party lawfully obtains from a third party who has the right to disclose .

(c)   Terms of this Agreement. Except as otherwise provided herein, during the term of this Agreement and for a period of five (5) years thereafter, neither party shall disclose any terms or conditions of this Agreement to any third party, without the prior consent of the other party.

(d)   Remedies. Because of the unique nature of the Confidential Information, the receiving Party acknowledges and agrees that the disclosing Party would suffer irreparable injury if the receiving Party fails to comply with the obligations set forth in Section 8(a) and that monetary damages would be inadequate to compensate the disclosing Party for such breach. Accordingly, the receiving Party agrees that the disclosing Party will, in addition to any other remedies available to it at law, in equity or otherwise, be entitled to injunctive relief and/or specific performance to enforce the terms, or prevent or remedy the violation, of Section 8(a). This provision shall not constitute a waiver by either Party of any rights to damages or other remedies which it may have pursuant to this Agreement or otherwise .

 
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(e)   Tax Treatment. Notwithstanding anything in this Agreement or in any other written or oral understanding or agreement to which the parties hereto are parties or by which they are bound, each party (and its representatives, agents and employees) may consult any tax advisor regarding the tax treatment and tax structure of the transaction contemplated by this Agreement and may at any time disclose to any person without limitation of any kind, the tax treatment and tax structure of such transaction and all materials (including opinions or other tax analyses) that are provided relating to such treatment or structure. The preceding sentence is intended to satisfy the requirements for the transaction contemplated herein to avoid classification as a “confidential transaction” in accordance with Treasury Regulations Section 1.6011-4(b)(3) and shall be interpreted consistent with such intent. This authorization is not intended to permit disclosure of any other information relating to the transaction contemplated by this Agreement, including (without limitation) (i) any portion of any materials to the extent not related to the tax treatment or tax structure of the transaction, (ii) the identities of participants or potential participants in the transaction, (iii) the existence or status of any negotiations, (iv) any pricing or financial information (except to the extent such pricing or financial information is related to the tax treatment or tax structure of the transaction), or (v) any other term or detail not relevant to the tax treatment or the tax structure of the transaction.

9.   NO WARRANTY; INDEMNIFICATION AND INSURANCE

(a)   EXCEPT AS EXPRESSLY SET FORTH HEREIN, BOTH PARTIES DISCLAIM ALL CONDITIONS, REPRESENTATIONS AND WARRANTIES, WHETHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR ANY WARRANTY OF NON-INFRINGEMENT OF THIRD PARTY RIGHTS, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW.

(b)  UNDER NO CIRCUMSTANCES SHALL A PARTY, OR ANY OF ITS AFFILIATES , DIRECTORS, OFFICERS, EMPLOYEES, REPRESENTATIVES, AGENTS, LICENSORS OR PARTNERS BE LIABLE FOR ANY SPECIAL, INDIRECT, INCIDENTAL, EXEMPLARY, CONSEQUENTIAL, OR PUNITIVE DAMAGES OF ANY KIND OR NATURE WHATSOEVER (INCLUDING LOSS REVENUE, PROFITS, USE OR OTHER ECONOMIC ADVANTAGE) ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY THEREOF, AND REGARDLESS OF THE LEGAL OR EQUITABLE THEORY (CONTRACT, TORT, OR OTHERWISE).

(c)   Except for AVID’s obligations under Section 4(c) and 9(e), (i),  AVID’s sole liability, and COMPANY’s sole remedy under this Agreement with respect to the Product not being manufactured in accordance with cGMP and/or the Proposal for Development shall be limited to the remedy and liability as provided in Section 2, and (ii)  AVID’s aggregate liability with respect to the activities performed under a specific Project Authorization shall in no event exceed the fees paid by COMPANY under such Project Authorization.

(d)   COMPANY Indemnification. COMPANY hereby agrees to defend, indemnify, and hold harmless AVID, its Affiliates, officers, employees, and agents, from and against all costs, expenses (including reasonable attorneys’ fees) and damages from third party claims or suits to the extent arising out of (i) COMPANY's negligence or willful misuse of any Project Data or Product delivered by AVID to COMPANY hereunder , (ii) any claim that any material or information provided by COMPANY pursuant to this Agreement infringes or violates the intellectual property rights of any third party, (iii) any product liability to the extent resulting from Product provided by AVID to COMPANY hereunder ( unless such liability is caused by the negligence or willful misconduct of AVID in the performance of its duties under this Agreement or any breach by AVID of any representation, warranty, covenant or term contained or incorporated in this Agreement) , or (iv) any breach by COMPANY of any representation, warranty, covenant or term contained or incorporated in this Agreement.

 
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(e)  AVID Indemnification. AVID shall indemnify, defend and hold harmless COMPANY, its Affiliates, officers, employees, and agents, from and against all costs, expenses (including reasonable attorneys’ fees) and damages from third party claims or suits to the extent arising out of (i) any negligence or willful misconduct by AVID relating to the performance of its duties under this Agreement , (ii) any claim that a method or process used by AVID in the manufacture of the Product hereunder infringes or vio lates the intellectual property of any third party , or (ii) any breach by AVID of any representation, warranty, covenant or term contained or incorporated in this Agreement.

(f)   Indemnification Procedure. As a condition to the indemnified Party's right to indemnification under this Section, the indemnified Party shall give prompt notice to the indemnifying Party of any suits, claims or demands by third parties which may give rise to any loss for which indemnification may be required under this Section, but the indemnified Party’s failure to do so shall not affect the indemnifying Party’s obligation hereunder except to the extent of its actual damages as a result of such failure. The indemnifying Party shall be entitled to assume the defense and control of any suit, claim or demand of any third party at its own cost and expense. If the indemnifying Party shall assume the defense of such action, it shall not settle such action without the prior written consent of t he indemnified Party, which consent shall not be unreasonably withheld or delayed; provided, however, that an indemnified Party shall not be required to consent to any settlement that (i) does not include as an unconditional term thereof the giving by the claimant or the plaintiff of an unconditional release of the indemnified Party from all liability with respect to such action or (ii) involves the imposition of equitable remedies or the imposition of any material obligations on such indemnified Party other than financial obligations for which such indemnified Party will be indemnified hereunder. As long as the indemnifying Party is contesting any such action in good faith and on a timely basis, the indemnified Party shall not pay or settle any claims brought in such action without the prior written consent of the indemnifying Party. Notwithstanding the assumption by the indemnifying Party of the defense of any action as provided herein, the indemnified Party shall be permitted to participate in the defense of such action and to employ counsel at its own expense; provided, however, that if the defendants in any action shall include both an indemnifying Party and any indemnified Party and such indemnified Party shall have reasonably concluded that counsel selected by indemnifying Party has a potential conflict of interest because of the availability of different or additional defenses to such indemnified Party, such indemnified Party shall have the right to select separate counsel to participate in the defense of such action on its behalf, at the expense of the indemnifying Party, it being understood, however, that the indemnifying Party shall not be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for all indemnified parties (in addition to local counsel) in such action or group of related actions.

 
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If the indemnifying Party shall fail to notify the indemnified Party of its desire to assume the defense of any such action within 30 days of receipt of notice of such action, or shall notify the indemnified Party that it will not assume the defense of any such action, then the indemnified Party may assume the defense of any such action, in which event it may do so acting in good faith in such manner as it may deem appropriate, and the indemnifying Party shall be bound by any determination made in such action.

(g)  Insurance. Each Party shall obtain, at its expense, property, commercial and liability insurance covering its obligations hereunder, in each case in amounts appropriate to the conduct of its business, as determined in its sole and exclusive judgment. Each Party shall make available to the other Party at such other Party’s request certificates of insurance evidencing satisfaction of its obligations under this Section 9(g).

(h)   Intellectual Property Infringement. Notwithstanding anything to the contrary in this Agreement, COMPANY shall have no liability to AVID or any third party for any infringement of intellectual property rights due to the use by AVID of a method or process used in the manufacture of Product.

10.   TECHNOLOGY TRANSFER; COMMERCIAL SUPPLY

(a)  Transfer of Technology upon Expiration of Projects. If, following the completion of the last Project or at any time during this Agreement following the uncured breach of a provision of this Agreement by AVID, COMPANY desires to (or desires a third party to) process or manufacture Product, then (i) AVID shall grant COMPANY a non-exclusive license under the AVID Know-How and AVID Patent Rights solely to make and have made Product, (ii) AVID shall transfer to COMPANY all data, know-how, technology, or information generated during the performance of this Agreement that is reasonably necessary to make and have made Product, and AVID shall provide reasonable assistance required to enable COMPANY to manufacture the Product for itself or through a third party (but in no event shall AVID be obliga ted to provide more than 1000 person hours to any such technology transfer activities unless AVID agrees in writing thereto); provided, however, that any such data, know-how, technology, or information comprising AVID Know-How shall continue to be AVID Confidential Information, but may be disclosed to such third party manufacturers pursuant to written agreements containing confidentiality and non-use provisions no less restrictive than those set forth herein, and (iii) COMPANY shall pay to AVID the fully burdened costs of assisting in any such technology transfer of $125.00 per hour, plus all out-of-pocket costs related thereto.

(b)   Transfer of Technology upon Breach by AVID. If, following the uncured breach of a provision of this Agreement by AVID, COMPANY desires to (or desires a third party to) process or manufacture Product, then (i) AVID shall grant COMPANY a non-exclusive license under the AVID Know-How and AVID Patent Rights solely to make and have made Product, and (ii) AVID shall transfer to COMPANY all data, know-how, technology, or information generated during the performance of this Agreement that is reasonably necessary to make and have made Product, and AVID shall provide reasonable assistance required to enable COMPANY to manufacture the Product for itself or through a third party; provided, however, that any such data, know-how, technology, or information comprising AVID Know-How shall continue to be AVID Confidential Information, but may be disclosed to such third party manufacturers pursuant to written agreements containing confidentiality and non-use provisions no less restrictive than those set forth herein.

 
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(c)   Option for Additional Commercial Supply. The parties acknowledge that upon completion of the last Project, COMPANY may desire that AVID manufacture additional commercial quantities of Product for COMPANY. If COMPANY provides to AVID a written notice requesting that AVID manufacture such commercial quantities of Product, the parties shall meet and negotiate in good faith upon the terms and conditions of an agreement governing such manufacture of Product.

11.   TERMINATION

This Agreement shall terminate upon completion of the last Project unless earlier terminated in accordance with one of the provisions below.

(a)   COMPANY shall have the right to terminate this Agreement at any time for any reason, upon 30 days prior written notice to AVID. In the event of such termination as requested by COMPANY, AVID shall suspend work at the earliest possible point, and COMPANY shall pay AVID upon receipt of AVID’s invoice all of AVID’s costs and expenses incurred, in addition to all costs irrevocably obligated, at that point in time.

(b)  If, at any time, it becomes apparent to AVID, in its sole good faith judgment, that due to scientific or technical reasons out of the reasonable control of either party it will make it impossible or highly impracticable to complete a Project, the parties will (i) identify and further investigate, as required, the problem, (ii) submit the recommended solutions, if any, to the problem to senior management of each party, (iii) negotiate in good faith for a sixty (60) day period from the date senior management first convenes to resolve such problems in a commercially reasonable manner, and (iv) implement any such resolution or, if there is no commercially reasonable resolution at the end of such period, the parties shall agree to a wind-down process for such Project and the Agreement at the conclusion of which it shall terminate . In the event of such termination, COMPANY shall pay to AVID all of AVID’s costs incurred, in addition to all costs irrevocably obligated, up to the date of termination, upon receipt of AVID’s invoice.

(c)  Either Party shall have the right to terminate this Agreement upon the occurrence of any of the following events: (i) if the other commits a breach of this Agreement which (in the case of a breach capable of remedy) is not remedied within 30 days of the receipt by the breaching Party of notice identifying the breach and requiring its remedy; or (ii) if the other ceases for any reason to carry on business or convenes a meeting of its creditors or has a receiver or manager appointed in respect of all or any part of its assets or is the subject of any proposal for a voluntary arrangement or enters into liquidation.

(d)   The Parties may terminate this Agreement at any time by mutual written consent.

(e)   Upon termination of this Agreement and in accordance with the provisions of Section 2(j), AVID shall return to COMPANY all COMPANY Property and Project Data once all compensation and incurred charges owed to AVID up to the date of termination have been fully paid to AVID. The termination of this Agreement for any reason shall not relieve COMPANY of its obligation to AVID with respect to compensation for services performed in accordance with this Agreement and the following Cancellation Fee.

 
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(f)  Cancellation Fee. Recognizing that AVID will reserve certain manufacturing space to complete the Projects , COMPANY hereby agrees to pay AVID a cancellation fee solely for the cancellation of cGMP Manufacturing project as more particularly described in the Proposal for Development. The cancellation fee shall be calculated by taking the product of (i) the cost proposed for cGMP Manufacturing per the Proposal for Development and (ii) the applicable percentage based set forth below based on the date of termination:
 
No cancellation fee
20% cancellation fee
33% cancellation fee
 
12.   FORCE MAJEURE

Either Party shall be excused from performing its respective obligations under this Agreement if its performance is delayed or prevented by any event beyond such Party’s reasonable control, including, but not limited to, acts of God, fire, explosion, weather, disease, war, insurrection, civil strife, riots, government action, earthquake, terrorism, or power failure, provided that such performance shall be excused only to the extent of and during such disability. Any time specified for completion of performance in the Proposal for Development falling due during or subsequent to the occurrence of any or all such events shall be automatically extended for a period of time to recover from such disability. AVID shall promptly notify COMPANY if, by reason of any of the events referred to herein, AVID is unable to meet any such time for performance sp ecified in the Proposal for Development.

13.   MISCELLANEOUS

(a)   Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to the conflicts of laws or rules thereof.

(b)   Dispute Resolution . Any dispute, controversy or claim initiated by either party arising out of , resulting from or relating to this , or the performance by either party of its obligations under this Agreement (other than bona fide third party actions or proceedings filed or instituted in an action or proceeding by a third party agai nst a party to this Agreement), whether before or after termination of this Agreement, shall be finally resolved by binding arbitration. Whenever a party shall decide to institute arbitration proceedings, it shall give written notice to that effect to the other party. Any such arbitration shall be conducted under the Commercial Arbitration Rules of the American Arbitration Association by a panel of three arbitrators appointed in accordance with such rules. Any such arbitration shall be held in San Diego, California if initiated by AVID, and in Santa Ana, California if initiated by COMPANY. The method and manner of discovery in any such arbitration proceeding shall be governed by California Code of Civil Procedure § 1282 et seq. (including without limitation California Code of Civil Procedure § 1283.05). The arbitrators shall have the authority to grant specific performan ce and to allocate between the parties the costs of arbitration in such equitable manner as they determine. Judgment upon the award so rendered may be entered in any court having jurisdiction or application may be made to such court for judicial acceptance of any award and an order of enforcement, as the case may be. In no event shall a demand for arbitration be made after the date when institution of a legal or equitable proceeding based upon such claim, dispute or other matter in question would be barred by the applicable statute of limitations. Notwithstanding the foregoing, either party shall have the right, without waiving any right or remedy available to such party under this Agreement or otherwise , to seek and obtain from any court of competent jurisdiction any interim or provisional relief that is necessary or desirable to protect the rights or property of such party, pending the selection of the arbitrators hereunder or pending the arbitrators’ determination of any dispute, controversy or claim hereunder .

 
  17   
 
 
(c)   Independent Contractors. For purposes of this Agreement, AVID shall be deemed to be an independent contractor and not an agent or employee of COMPANY and nothing in this Agreement shall be construed to create any other relationship between AVID and COMPANY. Neither Party shall have any right, power, or authority to assume, create, or incur any expense, liability or obligation, expressed or implied, on behalf of the other, except as expressly set forth in the Proposal for Development. AVID shall be solely responsible for withholding and payment of all appropriate state and federal taxes, including social security payments, with respect to all of its employees.

(d)   Severability/Enforceability. If any provision(s) of this Agreement shall be held invalid, illegal, or unenforceable by a court of competent jurisdiction, this Agreement shall continue in full force and effect without said provision(s), consistent with the intent of the Parties at the time of its execution. If deletion of such provision materially alters the basis of this Agreement, then the Parties shall negotiate a good faith alternative.

(e)   Modification/Waiver. This Agreement, including the Proposal for Development, may not be altered, amended, or modified, nor shall any obligation or breach be deemed waived, in any way, unless such alteration, amendment or modification is in writing and signed by the Parties or such waiver is in writing and signed by the waiving Party. The failure of a Party to enforce any provision(s) of this Agreement shall not be construed to be a waiver of the right of such Party to thereafter enforce that provision or any other provision or right.

(f)  Notices. All notices and demands required or permitted to be given or made pursuant to this Agreement shall be in writing and shall be deemed given if delivered personally or by facsimile transmission (receipt verified), telexed, mailed by registered or certified mail (return receipt requested), postage prepaid, or sent by express courier service, properly addressed to the address of the Party to be notified as shown below:

 
  18   
 
 
If to AVID:
Avid Bioservices, Inc.
14282 Franklin Avenue
Tustin, CA 92780 USA
Attention: Paul Lytle
Telephone: 714-508-6100
Facsimile: 714-838-5817

with a copy to:
Falk, Shaff & Ziebell LLP
18881 Von Karman Avenue, Suite 1400
Irvine, California 92612
Attn: Mark Ziebell, Esq.
Telephone: 949-660-7700
Facsimile: 949-660-7799

If to Hyalozyme:
Hyalozyme Therapeutics Inc.
11588 Sorrento Valley Road, Suite-16
San Diego, CA 92121
Attention: Dr. Greg Frost
Telephone: 858-794-8889 x305
Facsimile: 858-259-2539

with a copy to:
Gray Cary Ware & Freidenrich LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92121-2133
Attn: Mark R. Wicker, Esq.
Telephone: (858) 677-1489
Facsimile: (858) 677-1477

 
or to such other address as to which either Party may notify the other. Any notice sent by facsimile transmission or telex shall be followed within 24 hours by a signed notice sent by first class mail, postage prepaid.

(g)  Financial Information. Upon request, COMPANY shall provide AVID with a copy of current financial statements for the COMPANY prior to the commencement of any Project Authorization.

(h)   Assignability. Neither Party may assign its rights and/or delegate its obligations under this Agreement to any third party without the other Party’s prior written consent ; provided, however, that COMPANY may, without such consent, assign this 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, consolidation, change in control or other similar transaction .

(i)   Public Announcements. No public announcement relating to the Product or this Agreement shall be made by either Party without the prior written consent of the other Party, and neither Party shall use the other Party’s name, trademark or trade name, or the name of any employee of the other Party in any advertising or news release without the prior written consent of the other Party. Notwithstanding the foregoing, either Party may at any time make any announcement which is required by applicable law, agency regulation or administrative order.

 
  19   
 
 
(j)   Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and permitted assigns.

(k)   Survival. The following paragraphs, to the extent applicable, shall survive the termination or expiration of this Agreement for any reason: 2(c) (with respect to payments owing at the date of such termination or expiration), 2(h), 2(i), 2(j), 2(k), 2(l ), 3, 5, 7, 8, 9, 10, 11 and 13.

(l)   Integration. This Agreement, including the Proposal for Development, the MTA , shall constitute the entire Agreement between the Parties with respect to the subject herein and shall supersede all prior communications, understandings, and agreements (including any prior confidentiality agreement) with respect thereto. The terms of this Agreement shall prevail in the event of unclear or conflicting terms in the Proposal for Development or the MTA .

(m)   Counterparts. This Agreement may be executed in two counterparts, each of which shall be deemed an original and both of which together shall constitute one instrument. This Agreement may be evidenced by facsimile signatures.

IN WITNESS THEREOF, the Parties have caused this Agreement to be duly executed as of the day and year first above written.

HYALOZYME THERAPEUTICS INC.



By: /s/ Jonathan Lim                                                  

Jonathan Lim, MD, President and CEO                    
Print name and title


AVID BIOSERVICES, INC.

By: /s/ William Jay Treat                                           
William Jay Treat, Ph.D. VP Business Development
Print name and title

 
  20   
 
EXHIBIT A

 
     
 
 
 
 
 
 
 
                                                                                            

Project Proposal

Phase I-II

cGMP Manufacturing of OPTIPHASE™ ENHANZE for
 Human Therapeutic Applications at 100L Scale

Technology for Ophthalmic Anesthesia

cGMP Manufacturing of CUMULASE™-IVF for
Diagnostic Applications at 100L Scale

For Separation of Cumulus Cells from Egg Cells prior to In Vitro Fertilization (IVF) Procedures

Prepared For:

Hyalozyme Therapeutics Inc.
Dr. Gregory Frost

Date:

April 29, 2003 (revised 11-1-03)

Avid Bioservices, Inc. Contact:

William Jay Treat Ph.D., Head of Business Development
(714) 508-6159
jtreat@avidbio.com

14282 Franklin Avenue, Tustin, California 92780

(714)508-6100     FAX: (714)838-9433

 
  22   
 
PROJECT OVERVIEW

This proposal contains a summary overview and description of the processes used for the production of OPTIPHASE™, ENHANZE technology for Ophthalmic
Anesthesia and Hyaluronidase rHuPH20 CUMULASE™-IVF for separation of cumulus cells from egg cells prior to In Vitro Fertilization (IVF) procedures. Hyalozyme intends to initiate sales of CUMULASE-IVF rHuPH20 formulation by Q4 2004 under 510(k) approval. It is expected that bulk material for CUMULASE-IVF will be supplied to an external fill finish contractor for filling up to 200,000 1-ug vials. Hyalozyme intends to file an NDA for Optiphase™ in 2004. Avid designed the suggested course of action and processes contained in this proposal based on HYALOZYME ’s assumptions on general cell culture processes including base data on expression levels, culture m ethods and purification procedures and yields.

This proposal is for developing biological material for toxicology and commercial introduction (prior to filing the BLA / NDA / PMAA process validation should be performed which will be a very involved project in itself) of a diagnostic and therapeutic protein. The cell line is a Chinese Hamster Ovary (CHO) producing an engineered human PH20 as a soluble glycoprotein at ~10mg/L. Initial information provided by HYALOZYME utilizing a non-optimized process, yields of over 4,000 doses per liter. Avid anticipates that the process will be batch in 100 L stirred tank bioreactor for this stage. After evaluation of cell culture performance, fed-batch and perfusion may be considered as options for future requirements. Both upstream and downstream processes will be developed at AVID, but based upon technical information provided by HYALOZYME . Small scale bioreactor data, scale-up and culture parameters will be confirmed in 22.5L system followed by 1 x 100 L shakedown run prior to the cGMP run. AVID would produce three(3) 100 L cGMP lots of bulk enzyme.

In addition to the items to be provided to Avid by HYALOZYME under each project stage identified below, the following additional assumptions were used to determine the contents and pricing of this proposal:

     1.  Specifications for achievable cell density and viability, productivity were not available at the time this proposal was developed.

          2.  Specific details regarding the correct glycosylation and sialation patterns with respect to activity. HYALOZYME has indicated that the N-linked glycosylation of the rHuPH20’s are critical for their catalytic activity and stability. Altering the type of glycan modifying a glycoprotein can have dramatic effects on a protein's antigenicity, structural folding, solubility, and stability. Most enzymes are not thought to require glycosylation for optimal enzyme activity. rHuPH20s are thus unique in this regard, that removal of N-linked glycosylation can result in near complete inactivation of the Hyaluronidase activity. The presence of N-linked glycans is critical for generating an active rHuPH20. Complex glycosylation capped with sialation occurs in CHO cells which gives rise to more favorable pharmacokinetics over bovine or desialylated rHuPH20. Sialation is not required for enzymatic activity however.

          3.  Prior to using cells in either the process development or manufacturing areas, cells must meet specific industry standards and the most current FDA Points to
             Consider…

         4. In process and final product specifications were not available at the time this document was generated.

        5.   At the 9-26-03 meeting in San Diego, the total cost of the project including testing and raw materials was discussed. Issues related to the commercial manufacturing of the product will result in some increase from the original pricing, which was for cGMP manufacturing for clinical material and not for commercial manufacturing. First, the Toxicology material should now be produced under cGMP conditions as decided at the 9-26-03 meeting. If these can come from the first cGMP run then any additional costs will be minimal. Second, glycosylation pattern and specifications were not available at the time of the proposal and represent a significant cost that could be incurred by conducting additional glycosylation assays. Any development activities in the glycosylation area are at an additional charge per new quote. Third, since this is now commercial manufacturing, all assays must be validated, not just qualified as the pricing indicates in the assay table of this document. A revised quote that includes the price for assay validation will be presented. Fourth, ISO certification and CE marking will be on a separate proposal. Fifth, this proposal excludes the cost of cell culture media, MCB-WCB production and the associated testing covered by separate proposal. Sixth, MTX and glycosylation assay development, any filling activities beyond what is contained in this proposal must be on a separate proposal and the cost plus fee for raw materials and testing. Seventh, the purification process and associated resins were not available at the time of this proposal, therefore the costs for resins was an estimate.
 
 
  23   
 
 
      6. Additional information from 9-26-03 meeting included the anticipation that the purification process will be at room temperature and that the cGMP runs must be
          conducted under dedicated facilities restriction.

TIMELINE AND ACTIVITIES

The following is a summary of the anticipated steps and pricing associated with the development and manufacturing this enzyme for diagnostic and therapeutic purposes. Please note, to expedite the process, certain activities will occur in parallel instead of in series. For this proposal, it is assumed that both the OPTIPHASE™ and CUMULASE™-IVF will be generated in the same bioreactor run(s).
 
 
               Project:                    Project Initiation
               Timeline:        20-30 days
               Cost:         ***
               Start Date:               Per MS Project Timeline
 
               Process Steps:
·     AVID will coordinate a 1-day group onsite or teleconference meeting to initiate project. The meeting will include manufacturing, quality
          control, regulatory affairs, process development, and analytical methods development personnel.
·     AVID and HYALOZYME will finalize the project timeline that will detail all necessary project steps.
·     AVID will develop, in template form, all necessary manufacturing BPR’s, Formulation Records and Raw Material Specifications (RMS).
·     AVID will develop all production related documentation including cell culture parameters, purification process parameters and media
          requirements.
·     AVID will review quality documentation provided by HYALOZYME and generate a list of required SOP’s, testing, raw materials, equipment
          and Quality documentation necessary for the entire project.
·     AVID and HYALOZYME will establish list of key contacts and dates for pre-scheduled conference calls.
 
 
 
  24   
 
 
          Project:             Project Management
    Timeline:                Length of Project
    Cost:                      ***
    Start Date:             Per MS Project Timeline
 
    Process Steps:    
·     AVID will provide HYALOZYME with a dedicated Project Manager.
·     Project Manager will organize meetings.
·     Project Manager will update timelines as necessary.
·     Project Manager will communicate development results.
·     Project Manager will establish conference calls as appropriate.
·     Project Manager will generate and distribute meeting minutes
·     Project Manager will provide status reports prior to any teleconferences.
 

         Project:             Analytical Methods
             Timeline:                30 to 45 days
             Cost:                ***
             Start Date:              Per MS Project Timeline
 
             Process Steps:    
·     HYALOZYME will provide gold standard purified material if unavailable, AVID will develop material under a separate quote in consultation
           with  HYALOZYME.
·     AVID will qualify any of the following assays (3 runs per assay to qualify utilizing AVID’s standard assay protocol and final report format)
          appropriate for this product and as determined by CLIENT. Qualification documentation includes client specific protocols and final reports.
·     AVID will run additional samples for on-going projects as per fee in column 4 of Table 1 once the assay is qualified.
·     Any assay development work will be billed separately under a separate project. HYALOZYME will provide appropriate assistance to train Avid
          personnel for any specific assays transferred from HYALOZYME to AVID.
·     Excludes any dedicated columns or equipment specific to assay development or testing of product not specifically specified below.

Table 1


Assay
Setup and Test Fee
Cost to Qualify Assay (3x Runs)
Each Additional Sample After Assay Qualification
PAGE 1 (reducing)
$1,000 up to 4 samples
$3,000
$850 up to 4 samples
PAGE (non-reducing)
$1,000 up to 4 samples
$3,000
$850 up to 4 samples
IEF
 
$1,000 up to 4 samples
$3,000
$275
CIEF
 
Column (dedicated)
$1200 (includes up to 10 samples)
 
$300
$3600
 
 
 
$300
$1000 (includes up to 10 samples)
 
$300
ELISA Based Potency Assays
$1000 (includes 1 sample)
$3000
$50 per sample up to 10
A280
$125 (includes 2 samples)
$375
$50 per sample
PH
$50 (includes 2 samples)
$150
$25 per sample
Endotoxin (LAL)
$550 + $100 per sample up to 20 per plate
$1650
$100 per sample up to 20 per plate
Glycosylation
 
-Profiling
$3500 up to 5 samples
TBD
$500
Glycosylation
 
-Sequencing
$3500 including 1 band
TBD
$1500 per band
HPLC-SEC
 
Column (dedicated)
$600 (includes up to 2 samples)
 
$1200
$1800
 
 
 
$1200
$600
Peptide Mapping
TBD
TBD
TBD
N-Terminal Sequencing (non-GMP)
$350
$1050
$350
Bioassay
TBD
TBD
TBD
Conductivity
$50 (includes 2 samples)
$150
$25 per sample
CHO Proteins
TBD
TBD
TBD
1     PAGE bands can be visualized with either comassie or silver stain.
           Project:         Upstream Process Transfer and Media Selection
    Timeline:    30 to 45 days
           Cost:              ***
           Start Date:     Per MS Project Timeline

Process Steps:    
                      ·     HYALOZYME will transfer to AVID all available cell culture data available for the production cell line, however AVID recognizes that AVID will 
           likely develop this information for HYALOZYME.
·     AVID will identify the required materials for the media selection research bioreactor runs.
·     AVID will establish cell culture of the HYALOZYME cell line including static and spinner flask culture up to 1 liter spinner flask scale.
·     AVID will determine nutrient usage and productivity in 1 liter spinner flasks using the selected media.
·     AVID will prepare a final report in its standard format.
·     Excludes raw materials, supplies, outside testing, shipping, and other external costs as deemed necessary to complete the project.

           Project:        Upstream Process Development
           Timeline:       30-60 days
           Cost:                ***
                  Start Date:       Per MS Project Timeline
 
           Process Steps:
                                     ·     AVID will perform one research run at 22.5 liter scale to verify cell growth, density, productivity and viability prior to shakedown run.
·     AVID will purify research run material under Downstream Process Development mentioned below.
·     AVID will perform analytical testing (in-house assays as per Table 1) required of the specifications (excluding any special equipment) of the
          research run material. All in-house testing will be billed per fees list in Analytical Methods Transfer section. External testing required of the
          specifications will be billed as defined in the General Terms section.
·     AVID will perform an analysis of cell culture conditions including feed strategy.
·     AVID will generate a final report including recommendations for shakedown run conditions and parameters in its standard format.
·     Excludes raw materials, supplies, outside testing, shipping, and other external costs as deemed necessary to complete the project.
 

 
  26   
 
 
           Project:        Downstream Process Development
           Timeline:     30-60 days
           Cost:           ***
           Start Date:      Per MS Project Timeline

        Process Steps:
                                      ·     AVID will purify bulk filtrate supplied either by HYALOZYME or from the research bioreactor runs performed at AVID.
·     AVID will perform capacity, yield and purity studies using Avid’s standard purification process.
·     AVID will perform one (1) AKTA purification process to verify SOP’s/BPR’s for GMP manufacturing using 22.5L material from upstream
          process development.
·     AVID will perform one (1) scaled-up purification process to verify SOP’s/BPR’s for GMP manufacturing using 100L shakedown material.

           Project:        Shakedown Run
           Timeline:        20-30 days
           Cost:              ***
           Start Date:     Per MS Project Timeline
 
                  Process Steps:    
                       ·     AVID will perform non-clinical shakedown run(s) at the 100L scale to evaluate BPRs, SOPs and other production related documents
                            including personnel training.
·     AVID will analyze data from the runs to verify cell culture parameters, feeding strategies and purification parameters.
·     Cell material from the run will be purified according to BPRs by AVID.
·     AVID will generate a final batch report summarizing the run in AVID’s standard format.
·     AVID will review any changes implemented during shakedown run with HYALOZYME prior to cGMP runs.
·     Excludes raw materials, supplies, outside testing, shipping, and other external costs as deemed necessary to complete the project.
·     *Option: In order to get clinical material from the shakedown run at 100 L scale the batch has to be produced in compliance to QA
           requirements at Avid. Ideally a shake-down run at 100 L will generate information that can be used for developing the necessary controls for
           a CGMP run.

           Project:        cGMP Documentation
           Timeline:     30 to 45 days
           Cost:              ***
           Start Date:     Per MS Project Timeline
 
              Process Steps:    
·     AVID will generate draft BPR’s, formulation records, test methods and sampling plan from upstream and downstream development activities.
·     AVID will review any changes implemented during shakedown runs with HYALOZYME
·     AVID will route cGMP documents to HYALOZYME for approval with a two pass limit. Once HYALOZYME has approved cGMP documentation,
          they will be implemented into AVID’s system and issued by the QA Department. Manufacturing of cGMP material will not be initiated until all
          necessary documents have been signed.

           
 
 
  27   
 
 
           Project:        cGMP Manufacturing
           Timeline:     30 days
           Cost:              ***
           Start Date:     Per MS Project Timeline
 
                  Process Steps:    
·     AVID will perform cGMP 100 liter batch manufacturing run to produce clinical material for both OPTIPHASE™ and CUMULASE™-IVF.
·     AVID will perform in process and final bulk product testing of in-house assays.
·     AVID will arrange all outside testing
·     AVID will generate a certificate of analysis for the final bulk product.
·     AVID will provide one copy of AVID’s standard BPR.
·     Excludes raw materials, supplies, outside testing, shipping, and other external costs as deemed necessary to complete the project.
 
           Project:        Viral Clearance / Inactivation Validation Studies
           Timeline:        30 to 60 days
           Cost:               ***
           Start Date:      Per MS Project Timeline
 
                  Process Steps:
·     AVID will develop a scaled-down purification process.
·     AVID will qualify the scaled-down purification process by comparing it to the large scale process using SDS PAGE, SEC-HPLC, A 280 , and
           pH.
·     AVID will write a scale down protocol and scale-down report in AVID’s standard format.
·     AVID will transfer the process to a contract facility and will perform the viral spiking studies at the testing facility.
·     AVID will write a final report of the viral spiking studies.
·     Excludes raw materials, supplies, outside testing, shipping, and other external costs as deemed necessary to complete the project.

           Project:       CMC Documentation
           Timeline:       30 days
           Cost:              ***
           Start Date:    Per MS Project Timeline
 
              Process Steps:
·     AVID will generate the CMC documentation for an IND and/or NDA filing.
·     AVID will route CMC documentation to HYALOZYME for approval with a two pass limit.
·     AVID will implement changes as requested by HYALOZYME.
·     AVID will perform a final review of the CMC section by in-house regulatory.
 
 
 
  28   
 
 
           Project:       Stability Testing
           Timeline:       Length of Study
           Cost:             ***
           Start Date:    Per MS Project Timeline
 
           Process Steps:    
·     Stability testing for bulk drug substance and finished product can be provided in compliance with ICH guidelines, internal policies and
           procedures. Stability testing will include the execution of a protocol approved by both parties to include time points to be tested, stability
          conditions, orientation of samples and types of tests to be performed. The costs to perform stability testing will be based on these parameters
          and requirements.
 
 
           Project:       Media and Water Fills ( CUMULASE™)
           Timeline:      10 days
           Cost:            ***
           Start Date:   Per MS Project Timeline
 
        Process Steps:
·     Avid will generate protocol for media and water fills.
·     AVID will fill up to 250 vials under Class 100 conditions
·     AVID will write Media and Water fill Report summarizing fill and environmental data.
·     Excludes raw materials, supplies, outside testing, shipping, and other external costs as deemed necessary to complete the project.

 
           Project:       cGMP Filling ( CUMULASE™)
           Timeline:      10 days
           Cost:             ***
           Start Date:    Per MS Project Timeline
 
           Process Steps:
·     AVID will fill up to 250 vials under Class 100 conditions
·     AVID will perform Visual Inspection of vials under current SOP.
·     AVID to label and package filled product using existing labeling and packaging methods.
·     AVID will procure vials, stoppers, overseals, labels and packaging.
·     Excludes raw materials, supplies, outside testing, shipping, and other external costs as deemed necessary to complete the project.
·     Excludes shipping validation studies

GENERAL TERMS

Final Agreement. AVID and HYALOZYME shall use their reasonable and best efforts to enter into a definitive “Agreement for Services” within 60 days of signing the “Project Proposal”.

Payment Terms. All amounts are in U.S. dollars. Payments are due and payable for each project step as follows:


 
  30   
 
 

 
Total
Outside Costs
Amount Due Upon Initiation of Each Project Step
%
Amount Due Upon Completion of Fermentation
%
Amount Due Upon Issuance of Final Report or Test Results
%
Project Initiation
***
 
***
***
***
***
***
***
Project Management ($3,000 due monthly)
***
 
***
***
***
***
***
***
Analytical Methods Transfer
***
***
***
***
***
***
***
***
Upstream Process Transfer & Media
***
***
***
***
***
***
***
***
Upstream Process Development
***
***
***
***
***
***
***
***
Downstream Process Development
***
***
***
***
***
***
***
***
cGMP Documentation
***
 
***
***
***
***
***
***
Viral Clearance Validation
***
***
***
***
***
***
***
***
100L Shakedown Run
***
***
***
***
***
***
***
***
100L Clinical Run (3x)
***
***
***
***
***
***
***
***
CMC Documentation
***
 
***
***
***
***
***
***
Media & Water Fills
***
***
***
***
***
***
***
***
Final Product Fills
***
***
***
***
***
***
***
***
Raw Materials, Testing, etc.*
***
 
 
 
 
 
 
 
Stability Studies
***
 
 
 
 
 
 
 
Total
***
 
***
 
***
 
***
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
All other Invoices will be due and payable within 30 days of invoicing.
 
 
 
  30   
 
 

 
Following table provides estimates of raw material usage (excluding cell culture media).
Ca tegory*
Est. Pricing
Range
Sterility, mycoplasma, residual DNA, residual proteins, residual Protein A, etc
***
 
Disposable bags, tubing, filters for buffers,media etc in upstream and downstream
***
 
 
***
Purification columns (3)
***
***
Resins-Capture (per L)
***
***
Resins-Polish (per L)
***
***
Resins-Polish ([per L)
***
***
DV-20 filter & conc. (ea)
***
***
Viral Inactivation Suite & Testing (depending on viruses selected-at Phase I usually 1 virus)
***
***
Total
***
 

Raw Materials. The price of each Project Proposal step excludes all raw materials, supplies, outside testing, in-house testing (unless specified), shipping and handling charges. Primary Materials required to complete the each project step will be billed in advance at cost plus 12%. “Primary Materials” shall include dedicated resins, cell culture media, columns, high end disposables (sterile bags, filters) and any other raw material or equipment with an estimated cost of greater than $500.00 needed to complete the scope of the project set forth in this proposal. Additional raw materials will be billed at cost plus 12% on a monthly basis as incurred during the project. External testing will be billed at cost plus 20% on a monthly basis as incurred during the project. The 12% on primary and additional raw materials covers the many associated tasked including ordering and receiving into inventory. The 20% for external testing includes the shipping of material, reviewing documentation, communications and generation of reports. Invoices are due and payable within 30 days of invoicing.

Travel Expenses. All travel, if pre-approved by HYALOZYME, will be billed at cost.

Scope Changes. Additional work performed outside the scope of this proposal to include but not limited to changes in BPR’s, assays and sampling plans will be billed at $125.00 per hour upon prior written authorization by HYALOZYME.

Documentation Fee. Unless specified under each project step, any additional copies of documents will be billed to client at a rate of $1.50 per page.

Regulatory Inspections. A daily fee of $2500.00 will be charged should as a consequence of this or other related HYALOZYME projects, AVID be inspected by regulatory authorities such as CDRH, CBER, CDER or EMEA. AVID will host the first two days of the FDA pre-approval inspection (PAI), beyond that client will be responsible for above fees. Any due diligence audit in preparation of a PAI by the client will be limited to one day and two auditors at no charged. Additional day(s) with up to two auditors will be billed at the above fee.

Indemnification . HYALOZYME hereby agrees to defend, indemnify, and hold harmless AVID, its Affiliates, officers, employees, or agents, from and against all costs, claims, suits, expenses (including reasonable attorneys’ fees) and damages arising out of or resulting from (i) HYALOZYME's negligent or willful misuse of any Project Data or Product or (ii) any claim that any cell line, raw material, or process provided by HYALOZYME pursuant to this Proposal infringes a valid patent or is a violation of trade secret or other proprietary rights of a third party, and (iii) any Product Liability claim arising out of or resulting from the storage, use or administration of the Product, provided such claim does not arise out of or result from any injury to or death of any person or damage to property which arises out of or in connection with any negligent or willful misconduct or omission by AVID relating to the performance of this Agreement.
 

 
 
  31   
 
 
AVID shall indemnify, defend and hold harmless HYALOZYME, its Affiliates, officers, employees, or agents, from and against all costs, claims, suits, expenses (including reasonable attorneys’ fees) and damages arising out of or resulting from (i) any injury to or death of any person or damage to property which arises out of or in connection with any negligent or willful misconduct or omission by AVID relating to the performance under this Proposal or (ii) any claim that any material or service provided by AVID in the course of the Project infringes a valid patent or is a violation of trade secret or other proprietary rights of a third party.

Terms. All terms offered in this proposal expire 60 days from the date of this proposal. If an agreement to proceed has not been reached by that time, AVID reserves the right to propose changes to any part of this proposal. AVID considers this proposal confidential information under any Confidentiality Agreement entered into with HYALOZYME and is expressly not to be copied or provided to 3 rd parties without the expressed written consent from AVID, except as permitted under such agreement.
 
IN WITNESS THEREOF, the Parties have caused this Proposal to be duly executed as of ____ day of ____________, 2003.

HYALOZYME Therapeutics Inc.

By:_______________________________________

__________________________________________

Print name and Title


AVID BIOSERVICES, INC.

By:_______________________________________
 
__________________________________________
              Print name and Title


 
 
  32   
 
EXHIBIT B

PROJECT AUTHORIZATION FORM (example)



Project Authorization Number:                                                    SCIENTIST NAME-xxx                                                 

Total Costs:  $                                                                                                                                      &a mp;a mp;a mp;n bsp;                                  
 
Brief Summary of Activities in this Project Authorization
                       Project:       Upstream Process Development
           Timeline:      30-60 days
                     Cost:             $ per day in 22.5L bioreactor (anticipate 7 days in growth mode plus 23 days in perfusion = 30 total x $
                         = $)
 
           Start Date:   Per MS Project Timeline
                  Process Steps:
·  AVID will perform one research perfusion run at 22.5 liter scale to verify cell growth, density, productivity, viability and 
  perfusion parameters.
·   AVID will perform standard in-house analytical testing.
·   AVID will perform an analysis of cell culture conditions.
·   AVID will generate a final report in its standard format.
·   Excludes raw materials, supplies, and outside testing, shipping, and other external costs as deemed necessary to
  complete the project.



Projects:


Project Description
Project Code
Project Cost
Estimated Completion Date
1. 22.5L perfusion development for a 30 days perfusion at $/d
2. Cell culture media @$30/L x 20L/d x 30d
3. Perfusion cartridge (ATF-4)
4. Consumables
270
$
$
$ ea.
$ (est.)
TBD
1. Payment terms (___ within 30 days of signing and ___ after completion).
2. As per proposal, raw materials and supplies, in-house and outside testing, shipping, and other costs as deemed necessary to complete the project will be billed at cost plus __%.

Authorization:

 
           Hyalozyme Therapeutics Inc.                    Avid Bioservices Inc.
 
           Name:________________________           Name:___ William Jay Treat, Ph.D.           
           Signature: _____________________     Signature:__________________________
           Title:_________________________     Title:____ VP Business Development         
           Date:_________________________     Date:______________________________

 
  33   
 
EXHIBIT C



QUALITY AGREEMENT



To Be Reviewed Separately From This Agreement and Deliberately Left Blank









 
  34   
 
EXHIBIT D

SPECIFICATIONS



Intentionally left blank, specifications to follow and must be agreed to in writing by both parties prior to the initiation of any cGMP activities.



 
  35   
 
 

Exhibit 10.4
CONFIDENTIAL TREATMENT REQUESTED – EDITED COPY




NON-EXCLUSIVE DISTRIBUTION AGREEMENT

THIS NON-EXCLUSIVE DISTRIBUTION AGREEMENT (this “Agreement”), dated as of January 30, 2004 (the “Effective Date”) is entered into between MID ATLANTIC DIAGNOSTICS, INC. (“Distributor”), a New Jersey corporation, having a place of business located at 438 North Elmwood Road, Marlton, NJ 08053, and HALOZYME THERAPEUTICS, INC. (“Halozyme”), a California corporation, having a principal place of business at 11588 Sorrento Valley Road, Suite 17, San Diego, CA 92121. The parties hereby agree as follows:

1.     Appointment and Scope .

1.1     Appointment . Subject to the terms and conditions and for the term of the Agreement, Halozyme hereby appoints Distributor as a non-exclusive, worldwide distributor of the recombinant human hyaluronidase described on Exhibit A (the “Product(s)”). Distributor hereby accepts such appointment and shall use its commercially reasonable efforts to promote, market, distribute and sell the Product.

1.2     Independent Purchaser Status . Distributor shall be an independent purchaser and seller of the Product. Distributor shall not act as an agent or legal representative of Halozyme, nor shall Distributor have any right or power to act for or bind Halozyme in any respect or to pledge its credit. Except as expressly set forth herein, Distributor shall be free to resell the Product on such terms as it may, in its sole discretion, determine, including price, returns, credits and discounts. The detailed operations of Distributor under the Agreement are subject to the sole control and management of Distributor.

2.     Terms and Conditions of Supply of Products . Halozyme shall manufacture, sell and deliver, and Distributor shall purchase from Halozyme, such Products as Distributor requires for resale on the terms and subject to the conditions set forth below:

2.1   Price . The price for the Product shall be (a) the transfer price set forth on Exhibit A, or (b) in the event that the FDA or its foreign equivalent should materially change its regulatory policy(ies) resulting in an improved market for the Product (including without limitation a policy change resulting in the withdrawal of market approval for bovine or ovine hyaluronidase products), the price negotiated in good faith between the parties taking into account such policy change.

2.2   Delivery . All the Product supplied under this Agreement shall be shipped f.o.b. place of manufacture to such location as designated by Distributor in the applicable purchase order. Distributor shall pay all freight, insurance charges, taxes, import and export duties, inspection fees and other charges applicable to the sale and transport of the Product purchased by Distributor hereunder. Title and risk of loss and damages to the Product purchased by Distributor hereunder shall pass to Distributor upon placement by Halozyme with the common carrier selected by Distributor.
 
_____________________________________

*** Confidential material redacted and submitted separately to the Securities and Exchange Commission.

 
  1   
 
 
2.3   Sales and Use Taxes . Distributor shall pay any federal, state, county or municipal sales or use tax, excise or similar charge, or other tax assessment (other than that assessed against income), assessed or charged on the sale of the Product sold pursuant to this Agreement.

2.4   Payments . Distributor shall pay Halozyme within thirty (30) days from date of the applicable invoice by Halozyme to Distributor for all Products purchased hereunder for sale by Distributor. Distributor shall make all payments under the Agreement to Halozyme in United States dollars to such account as Halozyme advises Distributor from time to time.

2.5   Forecasts . On or before March 31 st , 2005, and prior to the first day of each calendar month thereafter, Distributor shall prepare and provide Halozyme with a written forecast of the estimated requirements of Distributor for each month in the succeeding twelve (12) months. Distributor shall be required to purchase one hundred percent (100%) of the quantity forecasted for the first three (3) month period of each forecast. With respect to the fourth (4th) through sixth (6th) month of each forecast, Distributor shall not increase or decrease the quantity forecasted for such month by more than twenty-five percent (25%) of the quantity estimate d for such month in the previous forecast, without the prior express written consent of Halozyme. Halozyme shall meet Distributor’s delivery requirements specified in accordance with Section  2.6 below.

2.6   Orders . Distributor shall make all purchases hereunder by submitting firm purchase orders to Halozyme. Each such purchase order shall be in writing in a form reasonably acceptable to Halozyme, and shall specify the quantity ordered, the transfer price therefor under Section  2.1 above, the place of delivery and the required delivery date therefor, which shall not be less than thirty (30) days after the date of such purchase order. In the event of a conflict between the terms and conditions of any purchase order and this Agreement, the terms and conditions of this Agreement shall prevail. Any additional terms in such purchase order shall be of no force or effect unless expressly agreed to in writing by Halozyme.

2.7   Returned Goods . If any Product does not conform to the specifications provided by Halozyme when received by Distributor (other than as a result of the action or inaction of the common carrier selected by Distributor) and does not pass Distributor’s quality control, for a period of fourteen (14) days following the delivery of such Product to Distributor, Distributor shall have the right to return such Product to Halozyme in accordance with the reasonable instructions of Halozyme or, on Halozyme’s request, dispose of such Product. In both cases all costs shall be borne by Halozyme. Should any Products be returned as provided above, Halozyme shall replace the returned Products as soon as reasonably practicable. Such re placement Products shall be at no additional cost to Distributor if Distributor had previously paid Halozyme for the returned Products Prior to shipment, Distributor shall notify Halozyme of the nature of the product failure as per pre-established standard operating procedures. Halozyme reserves the right to re-test any such returned products.

2.8   Warranty . Halozyme warrants that all the Product delivered to Distributor pursuant to this Agreement shall conform to the specifications provided by Halozyme and shall be free from defects in material and workmanship. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, HALOZYME MAKES NO OTHER WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE PRODUCT. HALOZYME DISCLAIMS ALL OTHER WARRANTIES, EXPRESS AND IMPLIED, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

 
  2   
 
 
2.9   Alternate Packaging . If Distributor desires to obtain any packaging configuration other than Halozyme’s standard packaging for the Product, the parties shall negotiate in good faith and attempt to reach mutually agreeable terms regarding such packaging configurations and the additional price therefor.

3.     Covenants of Distributor .

3.1   Sales Promotion . Distributor shall use its commercially reasonable efforts to promote the sale and use of the Product worldwide.

3.2   Expenses . Distributor shall be responsible for all of its own expenses and employees in connection with its activities contemplated by the Agreement. Distributor shall incur no expense chargeable to Halozyme, except as may be specifically authorized in advance in writing in each case by Halozyme.

3.3   Exclusivity . At the latest eighteen (18) months and the earliest twelve (12) months after the FDA clearance of the Product and the first commercial shipment to Distributor, and for so long as Distributor is promoting the sale and use of the Product under this Agreement, Distributor shall not promote, market or sell any product that constitutes bovine or ovine hyaluronidase, unless Distributor is required to do so to satisfy pre-existing contracts.

3.4   No Bundling . Distributor shall not condition the sale or transfer of the Product with the sale or transfer of any other product or the use of any service. For a period of one (1) year following the date Distributor commences distribution of the Vial Form (as defined in Exhibit A) of the Product, Distributor shall distribute each Vial Form of Product in separate individually boxed packaging with a separate invoice price.

3.5   Testing of Product . Distributor shall conduct the testing of the Product as set forth on Exhibit B.

4.     Regulatory Filings .

4.1   Distributor Obligations . If Distributor selects the Bulk Form (as defined in Exhibit A) of the Product, in whole or in part, Distributor shall obtain all required marketing approvals (if any) from the FDA or its foreign equivalent in every country in which Distributor promotes, markets or sells the resulting products. Distributor shall not promote, market or sell products resulting, in whole or in part, from the Bulk Form of the Product in a country unless and until Distributor has obtained such required marketing approval in such country. Distributor shall comply with all applicable regulatory requirements in any country in which Distributor promotes, markets or sells the Products or any products resulting from, in whole or in part, the Products. Distributor shall only sell the completed Vial Form (as defined in Exhibit A), and shall not re-sell the Bulk Form. In order for Halozyme to comply with Quality Systems Regulations (QSR’s) as promulgated by FDA and other regulatory authorities, Distributor must report to Halozyme any product complaints regarding the Product, within fourteen (14) days of the Distributor being informed of such complaint.

 
  3   
 
 
4.2   Halozyme Obligations . Halozyme shall provide Distributor, upon Distributor’s request and at Distributor’s reasonable cost, such data and other information (including by granting necessary cross-reference rights) available to Halozyme, and shall execute such certificates and other instruments, as necessary to assist Distributor in obtaining all necessary product registrations for products resulting, in whole or in part, from the Bulk Form of the Product. Prior to incurring any such cost under this Section   4.2 , Halozyme shall, upon Dis tributor’s request, notify Distributor of the estimated cost to provide any such requested data or other information.

5.                Confidentiality .

5.1   Confidential Information . During the term of this Agreement, and for a period of five (5) years following the expiration or earlier termination hereof, each party shall maintain in confidence all Confidential Information (as defined below) disclosed by the other party (including all Confidential Information disclosed prior to the term of this Agreement pursuant to a written confidentiality agreement between the parties), and shall not use, grant the use of or disclose to any third party the Confidential Information of the other party other than as expressly permitted hereby. Each party shall notify the other promptly upon discovery of any unauthorized use or disclosure of the other party’s Confidential Information. As used herein “ C onfidential Information” shall mean, with respect to a party, all information (and all tangible and intangible embodiments thereof) that is disclosed by such party to the other party and is marked, identified as or otherwise acknowledged to be confidential at the time of disclosure to the other party. Notwithstanding the foregoing, Confidential Information of a party shall not include information that the other party can establish by written documentation (a) to have been publicly known prior to disclosure of such information by the disclosing party to the receiving party; (b) to have become publicly known, without the fault of the receiving party, subsequent to disclosure of such information by the disclosing party to the receiving party; (c) to have been received by the receiving party at any time from a source, other than the disclosing party, rightfully having possession of and the right to disclose such information; (d) to have been otherwise known by the receiving party prior t o disclosure of such information by the disclosing party to the receiving party; or (e) to have been independently developed by employees or agents on behalf of the receiving party without access to or use of such information disclosed by the disclosing party to the receiving party.

5.2 Terms of this Agreement . Except as otherwise provided herein, during the term of this Agreement and for a period of three (3) years thereafter, neither party shall disclose any terms or conditions of this Agreement to any third party without the prior consent of the other party. Notwithstanding the foregoing, prior to the execution of the Agreement, the parties have agreed in writing upon the substance of information that can be used to describe the terms of this transaction (including for the purpose of issuing a press release), and either party may disclose such information, as modified by mutual agreement from time to time, without the other party’s consent. Notwithstanding anything in this Agreement or in any other written or oral understanding or agreement to whic h the parties hereto are parties or by which they are bound, each party (and its representatives, agents and employees) may consult any tax advisor regarding the tax treatment and tax structure of the transaction contemplated by this Agreement and may at any time disclose to any person without limitation of any kind, the tax treatment and tax structure of such transaction and all materials (including opinions or other tax analyses) that are provided relating to such treatment or structure. The preceding sentence is intended to satisfy the requirements for the transaction contemplated herein to avoid classification as a “confidential transaction” in accordance with Treasury Regulations Section 1.6011-4(b)(3) and shall be interpreted consistent with such intent. This authorization is not intended to permit disclosure of any other information relating to the transaction contemplated by this Agreement, including (without limitation) (i) any portion of any materials to the extent not related t o the tax treatment or tax structure of the transaction, (ii) the identities of participants or potential participants in the transaction, (iii) the existence or status of any negotiations, (iv) any pricing or financial information (except to the extent such pricing or financial information is related to the tax treatment or tax structure of the transaction), or (v) any other term or detail not relevant to the tax treatment or the tax structure of the transaction.

 
  4   
 
 
5.3   Limitations on Disclosure . Each party shall limit the disclosure of the Confidential Information of the other party and the terms of this Agreement on a need-to-know basis to those directors, officers, employees, consultants, legal and financial advisors, or permitted assignees, to the extent such disclosure is reasonably necessary in connection with such party’s activities as expressly authorized by this Agreement. To the extent that disclosure is authorized by this Agreement, prior to disclosure, each party hereto shall obtain agreement of any such Person to hold in confidence and not make use of the Confidential Information for any purpose other than those permitted by this Agreement.

5.4   Permitted Disclosures . The confidentiality obligations contained in this Section  5 shall not apply to the extent that such disclosure is reasonably necessary in the following instances: (a) complying with an applicable law, regulation of a governmental agency or order of a court of competent jurisdiction, or responding to a subpoena, request for production of documents or other lawful court process, (b) obtaining approval to test or market a Product, (c) prosecuting or defending litigation, and (d) disclosure to investment bankers, investors, and potential investors, each of whom prior to disclosure must be bound by similar obligations of confident iality and non-use at least equivalent in scope to those set forth in this Section  5 , provided in each case that the disclosing party shall provide written notice thereof to the other party and reasonable opportunity to object to such disclosure or to request confidential treatment thereof, if available.

6.                  Intellectual Property Rights .

6.1 Patent Rights . Halozyme does not, either expressly or impliedly, grant any licenses to Distributor under any patents owned or controlled by Halozyme or under which Halozyme has any rights, except the right to sell and use the Product on the terms and subject to the conditions of the Agreement.

6.2   Trademarks and Trade Names . Distributor shall not use any of Halozyme’s trademarks, or any mark or name confusingly similar thereto, as part of its corporate or business name or in any other manner, except that (a) Distributor may identify itself as an authorized Distributor of Halozyme; (b) Distributor shall prominently mark, in addition to Distributor’s own trade dress, any packaging of the Vial Form, on the vial label, with the following brand name “Cumulase TM ”; and on the package insert “Developed by Halozyme Therapeutics Inc., San Diego, California”, and; (c) Distributor shall not registe r any trade mark or trade name (including any company name) which is identical to or confusingly similar to or incorporates any trade mark or trade name which Halozyme or any associated company owns or claims rights in. Any other use of Halozyme’s trademarks shall be subject to written prior approval from Halozyme. Any goodwill associated with any trade marks affixed or applied or used in relation to Products sold or otherwise distributed by Distributor pursuant to this Agreement shall accrue to the sole benefit of Halozyme. Nothing in this Agreement shall create an obligation on Halozyme to register or otherwise maintain in force any trademarks.

 
     
 
 
6.3   Vial Form Product Markings . Distributor shall not alter, remove or modify any Halozyme trademarks, labels or markings, nor affix any other trademarks, labels, instructions, warnings or markings to or on the Products sold in Vial Form without Halozyme’s written consent; provided that Distributor may affix labels or other indices on such Products it distributes to identify it as the Distributor of Products so long as such labels do not cover and are not inconsistent with Halozyme’s trademarks, labels or markings.

6.4   Intellectual Property Infringement. The Distributor shall inform Halozyme immediately upon becoming aware of: (i) any infringements or risk of infringements by a third party of Halozyme’s intellectual property (including but not limited to brands, trademarks, copyrights, and patents), (ii) any infringements or risk of infringements by the Products of a third party’s intellectual property or claims of such by a third party. In the event of any such infringement, Distributor shall allow Halozyme to conduct (at Halozyme’s sole expense) the defense or settlement of any claim of intellectual property right infringement by or against a third party in relation to any of Halozyme’s intellectual property. Distribut or shall not compromise, settle or negotiate or make any statement on behalf of Halozyme. At Halozyme’s expense (as to reasonable out-of-pocket expenses only), Distributor shall cooperate with Halozyme in connection with any such infringement defense or prosecution.

6.5   Copyrights . Distributor hereby acknowledges that Halozyme has claimed, or may claim, copyright protection with respect to certain parts of the Products and the labels, inserts and other materials regarding the Products. Distributor further acknowledges the validity of Halozyme’s right to claim copyright protection with respect to such items. Distributor further acknowledges that Halozyme has the exclusive right (to the exclusion of all others) to claim the copyright protection with respect to all such items. If Distributor shall take any action or make any omission that is in any way inconsistent with Halozyme’s claim of copyright protection with respect to such items, such action or omissio n shall be a breach of this Agreement entitling Halozyme to terminate pursuant to Section  7.2 below. Nothing contained in this Section  6.5 shall prohibit Distributor from copying and distributing to its sales representatives Product advertising, literature and other materials prepared by or on behalf of Halozyme for the purpose of fulfilling Distributor’s obligations under the Agreement.

7.                 Term and Termination .

7.1   Term . Unless terminated earlier pursuant to Section  7.2 below, the Agreement shall continue in full force and effect for a term expiring five (5) years following the first commercial shipment to Distributor. The Parties will begin renegotiation of the Agreement after three (3) years in good faith pursuant to the phase out of the Distributor’s bovine or ovine hyaluronidase product.

7.2   Termination for Cause .

 
  6   
 
 
(a)   Except as otherwise provided in Section  8.2 , below, either party may terminate the Agreement upon or after the breach of any material provision of the Agreement by the other party if the other party has not cured such breach within on hundred and twenty (120) days after notice thereof from the nonbreaching party.

(b)   Halozyme shall have the right to terminate this Agreement, effective upon written notice to Distributor, if Distributor does not place an order for Product during any consecutive three (3) month period.

7.3   Effect of Expiration and Termination . Expiration or termination of the Agreement shall not relieve the parties of any obligation accruing prior to such expiration or termination. The provisions of Sections  5 , 6 and 8 shall survive the expiration or termination of the Agreement. Upon the expiration or termination of the Agreement, Halozyme shall have the right, at its option, to repurchase Distributor’s inventory of Products at Distributor’s purchase price plus reasonable freight, i nsurance and duties. In all other cases, Distributor shall have the right to sell the remaining stock of Products for a period of six (6) months following such expiration or termination. Notwithstanding the foregoing, Distributor and Halozyme shall negotiate in good faith the continuation of the delivery of Products due to still effective long-term contracts with customers. Halozyme either (a) shall continue to sell Products directly to such customers, or at Halozyme’s option, (b) enable Distributor to continue to purchase Products and to resell the same only to customers holding such long term contracts, on the terms and conditions provided for under this Agreement.

8.                 Miscellaneous .

8.1   Notices . Any consent, notice or report required or permitted to be given or made under this Agreement by one of the parties to the other shall be in writing, in the English language, delivered by any lawful means, and addressed to such other party at its address indicated in the preamble to this Agreement, or to such other address as the addressee shall have last furnished in writing to the addressor, and (except as otherwise provided in this Agreement) shall be effective upon receipt.

8.2   Force Majeure . Neither party shall be held liable or responsible to the other party nor be deemed to have defaulted under or breached the Agreement for failure or delay in fulfilling or performing any term of the Agreement to the extent, and for so long as, such failure or delay is caused by or results from causes beyond the reasonable control of the affected party including fire, floods, embargoes, war, acts of war (whether war be declared or not), acts of terrorism, insurrections, riots, civil commotions, strikes, lockouts or other labor disturbances, acts of God or acts, omissions or delays in acting by any governmental authority or the other party.

8.3 Assignment . Distributor shall not, without the prior express written consent of Halozyme which shall not be unreasonably withheld or delayed, assign or transfer this Agreement or any of its rights or obligations hereunder, whether directly or indirectly, whether in whole or in part, or whether voluntarily, by operation of law, in connection with its merger, consolidation, sale of all or substantially all of its assets, change in control or similar transaction, or otherwise. Any assignment or transfer in violation of this Section  8.3 shall be void.

 
  7   
 
 
8.4   Severability . Each party hereby acknowledges that it does not intend to violate any public policy, statutory or common laws, rules, regulations, treaty or decision of any government agency or executive body thereof of any country or community or association of countries. Should one or more provisions of this Agreement be or become invalid, the parties shall substitute, by mutual consent, valid provisions for such invalid provisions which valid provisions in their economic effect are sufficiently similar to the invalid provisions that it can be reasonably assumed that the parties would have entered into this Agreement with such provisions. In case such provisions cannot be agreed upon, the invalidity of one or several provisio ns of this Agreement shall not affect the validity of this Agreement as a whole, unless the invalid provisions are of such essential importance to the Agreement that it is to be reasonably assumed that the parties would not have entered into this Agreement without the invalid provisions.

8.5   Entire Agreement . This Agreement contains the entire understanding of the parties with respect to the subject matter hereof. All express or implied agreements, understandings, or representations either oral or written, heretofore made are expressly superseded by the Agreement. The Agreement may be amended, or any term hereof modified, only by a written instrument duly executed by both parties.

8.6   Headings . The captions to the several Articles and Sections hereof are not a part of the Agreement, but are merely guides or labels to assist in locating and reading the several Articles and Sections hereof.

8.7   Independent Contractors . It is expressly agreed that Halozyme and Distributor shall be independent contractors and that the relationship between the two parties shall not constitute a partnership, joint venture or agency. Neither Halozyme nor Distributor shall have the authority to make any statements, representations or commitments of any kind, or to take any action, which shall be binding on the other, without the prior consent of the party to do so.

8.8   Waiver . The waiver by either party of any right hereunder or the failure to perform or of a breach by the other party shall not be deemed a waiver of any other right hereunder or of any other breach or failure by said other party whether of a similar nature or otherwise.

8.9   Counterparts . The 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   
 
 
IN WITNESS WHEREOF, the parties have executed the Agreement as of the Effective Date.
MID ATLANTIC DIAGNOSTICS, INC.
 
By:      /s/ Terry Fortino                           
Name:     Terry Fortino                             
Title:        President                                  
 
HALOZYME THERAPEUTICS, INC.
 
By:      /s/ Johathan Lim ______________
Name: Johathan Lim ________________
Title:   President & CEO _____________

 
 
 
 
 
 
 

 
 
  9   
 
EXHIBIT A

Products

 
1.     Description of Product . A 10x concentrate (800 USP units/mL) of recombinant human hyaluronidase in buffered solution and stabilized with recombinant human serum albumin (rHSA).

2.     Product Forms . The Product is available in either (a) a 100 L labeled vial containing approximately 80 USP units of recombinant human hyaluronidase in the solution describe above (the “Vial Form”), or (b) a bottle containing approximately 80,000 USP units of the solution described above (the “ Bulk Form”). The parties acknowledge and agree that the Vial Form shall not be available to Distributor under this Agreement for distribution in any country unless and until Halozyme has received the required marketing approval (if any) from the FDA or its foreign equivalent in such country. Distributor shall only re-sell the Vial Form.

3.     Price . The following are the prices for the Vial Form and Bulk Form:

Form                Recommended List Price          Transfer Price

Vial Form                 ***                 ***

Bulk Form                                       ***                                        ***



 
  10   
 
EXHIBIT B


Testing of Product


Distributor shall test each Product as follows.

(A)     With respect to each Vial Form of Product purchased from Halozyme, Distributor shall visually inspect each product for proper labeling prior to shipment.

(B)     With respect to each Bulk Form of Product purchased from Halozyme, Distributor shall test each lot of finished product derived by Distributor from such Bulk Form of Product as follows (i) determine the potency of the recombinant human hyaluronidase by USP monograph, (ii) verify the sterility of the product, (iii) verify the pH, (iv) conduct a mouse embryo toxicity assay, and (v) verify the osmolality. All product testing must be performed with validated procedures.






 
 
  11   
 
 

Exhibit 10.5
CONFIDENTIAL TREATMENT REQUESTED – EDITED COPY



NON-EXCLUSIVE DISTRIBUTION AGREEMENT

THIS NON-EXCLUSIVE DISTRIBUTION AGREEMENT (this “Agreement”), dated as of February 9, 2004 (the “Effective Date”) is entered into between MediCult A/S (“Distributor”), CVR-no. 10975077, a Danish corporation, having a place of business located at Møllehaven 12, DK-4040 Jyllinge, Denmark, and HALOZYME THERAPEUTICS, INC. (“Halozyme”), a California corporation, having a principal place of business at 11588 Sorrento Valley Road, Suite 17, San Diego, CA 92121. The parties hereby agree as follows:

1.       Appointment and Scope .

1.1   Appointment . Subject to the terms and conditions and for the term of the Agreement, Halozyme hereby appoints Distributor as a non-exclusive, worldwide distributor of the recombinant human hyaluronidase described on Exhibit A (the “Product(s)”). Distributor shall distribute the Product (or any reformulation or part thereof) solely for use in the field of In Vitro Fertilization (IVF), which field expressly excludes in vivo therapeutic uses in humans or animals. Distributor hereby accepts such appointment and shall use its commercially reasonable efforts to promote, market, distribute and sell the Product.

1.2   Full Force . The parties acknowledge that Distributor’s acceptance of the terms and conditions of this Agreement are subject to Halozyme disclosing to Distributor adequate clinical documentation showing similar or better performance of Cumulase™ (the trademark of the Product) brand hyaluronidase in comparison with bovine or ovine hyaluronidase products in both mouse and human systems. Halozyme shall disclose such documentation to Distributor prior to Halozyme’s commercial launch of Cumulase™. If Halozyme cannot provide such documentation to the reasonable, good faith satisfaction of Distributor, Distributor shall have the right as its sole and exclusive remedy, and only for a period of thirty (30) days following Halozyme’s di sclosure of such documentation, to terminate this Agreement upon written notice to Halozyme. The provisions of Sections  5 , 6 , and 8 shall survive any such termination.

1.3 Independent Purchaser Status . Distributor shall be an independent purchaser and seller of the Product. Distributor shall not act as an agent or legal representative of Halozyme, nor shall Distributor have any right or power to act for or bind Halozyme in any respect or to pledge its credit. Except as expressly set forth herein, Distributor shall be free to resell the Product on such terms as it may, in its sole discretion, determine, including price, returns, credits and discounts. The detailed operations of Distributor under the Agreement are subject to the sole control and management of Distributor.

2.       Terms and Conditions of Supply of Products . Halozyme shall manufacture, sell and deliver, and Distributor shall purchase from Halozyme, such Products as Distributor requires for resale on the terms and subject to the conditions set forth below:

2.1   Price . The price for the Product shall be (a) the transfer price set forth on Exhibit A, or (b) in the event that the FDA or its foreign equivalent should materially change its regulatory policy(ies) resulting in an improved market for the Product (including without limitation a policy change resulting in the withdrawal of market approval for bovine or ovine hyaluronidase products), the price negotiated in good faith between the parties taking into account such policy change.
_____________________________________
*** Confidential material redacted and submitted separately to the Securities and Exchange Commission.
 
 
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2.2   Delivery . All the Products supplied under this Agreement shall be shipped f.o.b. place of manufacture in accordance with the delivery requirements specified by Distributor in accordance with Section  2.6 below to such location as designated by Distributor in the applicable purchase order. Distributor shall pay all freight, insurance charges, taxes, import and export duties, inspection fees and other charges applicable to the sale and transport of the Products purchased by Distributor hereunder. Title and risk of loss and damages to the Products purchased by Distributor hereunder shall pass to Distributor upon placement by Halozyme with the common carrier selected by Di stributor. Distributor shall be entitled to cancel a purchase order without prior notice in the event of a delay in delivery that was within the reasonable control of Halozyme. In the event that such a delay in delivery exceeds thirty (30) days from the date of a written notice of delay from the Distributor to Halozyme the Distributor shall be entitled to terminate this Agreement.

2.3   Sales and Use Taxes . Distributor shall pay any federal, state, county or municipal sales or use tax, excise or similar charge, or other tax assessment (other than that assessed against income), assessed or charged on the sale of the Product sold pursuant to this Agreement.

2.4   Payments . Distributor shall pay Halozyme within thirty (30) days from date of the applicable invoice by Halozyme to Distributor for all Products purchased hereunder for sale by Distributor. Distributor shall make all payments under the Agreement to Halozyme in United States dollars to such account as Halozyme advises Distributor from time to time.

2.5   Forecasts . On or before March 31 st 2005, and prior to the first day of each calendar month thereafter, Distributor shall prepare and provide Halozyme with a written forecast of the estimated requirements of Distributor for each month in the succeeding twelve (12) months. Distributor shall be required to purchase one hundred percent (100%) of the quantity forecasted for the first three (3) month period of each forecast. With respect to the fourth (4th) through sixth (6th) month of each forecast, Distributor shall not increase or decrease the quantity forecasted for such month by more than twenty-five percent (25%) of the quantity estimated for such month in the previous forecast, without the prior express written consent of Halozyme. Halozyme shall meet Distributor’s delivery requirements specified in accordance with Section  2.6 below. Purchase orders cancelled under Section  2.2 and orders not replaced under Section 2.7 shall be counted as purchases by the Distributor under the forecasts.

2.6   Orders . Distributor shall make all purchases hereunder by submitting firm purchase orders to Halozyme. Each such purchase order shall be in writing in a form reasonably acceptable to Halozyme, and shall specify the quantity ordered, the transfer price therefor under Section  2.1 above, the place of delivery and the required delivery date therefor, which shall not be less than thirty (30) days after the date of such purchase order. In the event of a conflict between the terms and conditions of any purchase order and this Agreement, the terms and conditions of this Agreement shall prevail. Any additional terms in such purchase order shall be of no force or effect unless expressly agreed to in writing by Halozyme.

 
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2.7   Returned Goods . If any Product does not conform to the specifications provided by Halozyme when received by Distributor (other than as a result of the action or inaction of the common carrier selected by Distributor) and does not pass Distributor’s quality control, for a period of twenty-one (21) days following the delivery of such Product to Distributor, Distributor shall have the right at its discretion to either (a) cancel its purchase order, in which case (i) Distributor shall then return such Product to Halozyme in accordance with the reasonable instructions of Halozyme or, on Halozyme’s request, dispose of such Product, and (ii) all costs for returning the Product shall be borne by Halozyme, or (b) request that Ha lozyme replace such Products within thirty (30) days following the receipt by Halozyme of a written notice of defect of such Product; provided, however, that if Halozyme fails to replace such Product in such thirty (30) days, Distributor shall be entitled to terminate this Agreement upon written notice to Halozyme. Such replacement Products shall be at no additional cost to Distributor if Distributor had previously paid Halozyme for the defective Products that have been returned or destroyed (as Halozyme directs). Prior to shipment, Distributor shall notify Halozyme of the nature of the product failure as per pre-established standard operating procedures. Halozyme reserves the right to re-test any such returned products.

2.8   Warranty . Halozyme warrants that all the Product delivered to Distributor pursuant to this Agreement shall conform to the specifications provided by Halozyme and shall be free from defects in material and workmanship. Moreover, Halozyme warrants that it holds full title to the Product, that it owns all intellectual property rights related to the Product that are necessary for the Distributor's purchase, promotion, marketing or sale of the Product in Vial Form and that such purchase, promotion, marketing or sale will not infringe any third party rights. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, HALOZYME MAKES NO OTHER WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE PRODUCT. HALOZYME DISCLAIMS ALL OTHER WAR RANTIES, EXPRESS AND IMPLIED, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

2.9   Product Liability . Halozyme shall be liable to Distributor pursuant to applicable product liability legislation for damage to persons caused by defects in the Products delivered by Halozyme in Vial Form. Such liability shall not exceed a maximum liability in the aggregate under this Agreement of three million dollars ($3,000,000). Halozyme shall take out insurance with respect to the manufacture and sales of Products in such amounts as Halozyme customarily maintains with respect to the manufacture and sales of its other products, but in no event less than commercially reasonable amounts. Not more than once in any twelve (12) month period, upon Distributor’s written request Halozyme shall provide to Distributor evidence o f such insurance. If a third party raises a claim under the product liability legislation, the Distributor shall immediately inform Halozyme hereof.

2.10   Alternate Packaging . If Distributor desires to obtain any packaging configuration other than Halozyme’s standard packaging for the Product, the parties shall negotiate in good faith and attempt to reach mutually agreeable terms regarding such packaging configurations and the additional price therefore.

3.       Covenants of Distributor .

3.1   Sales Promotion . Distributor shall use its commercially reasonable efforts to promote the sale and use of the Product worldwide.

 
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3.2   Expenses . Distributor shall be responsible for all of its own expenses and employees in connection with its activities contemplated by the Agreement. Distributor shall incur no expense chargeable to Halozyme, except as may be specifically authorized in advance in writing in each case by Halozyme.

3.3   Exclusivity . Within *** months after, but not less than *** months after, both (a) the FDA gives marketing approval or clearance for the *** and (b) the first commercial shipment to Distributor, and for so long as Distributor is promoting the sale and use of the *** under this Agreement, Distributor shall not promote, market or sell any product that constitutes ***, unless distributor is expressly required to do so to satisfy pre-existing contracts.

3.4   Product formulation . Distributor shall have the right to reformulate and sell the Bulk Form of the Product (as defined in Exhibit A) solely in a reformulation prepared using Distributor’s own patented hyaluronidase formulation to the extent covered by, and in accordance with, FDA registration #_________ (the “Distributor Reformulation”). Distributor shall be solely responsible, at its own expense, for maintaining such FDA registration covering the Distributor Reformulation. Halozyme will allow Distributor to seek 510(k) clearance for SynVitro® Cumulase™ product as quickly as that of the Vial Form.

3.5   Bundling . Distributor is free to sell and transfer the formulated Bulk Form of the Product with the sale or transfer of any other of the Distributors products or services. For a period of one (1) year following the date Distributor commences distribution of the Vial Form (as defined in Exhibit A) of the Product, Distributor shall distribute each Vial Form of Product in separate individually boxed packaging with a separate invoice price.

3.6 Testing of Product . Distributor shall conduct the testing of the Product as set forth on Exhibit B.

4.      Regulatory Filings .

4.1   Distributor Obligations . If Distributor selects the Bulk Form (as defined in Exhibit A) of the Product, in whole or in part, Distributor shall obtain all required marketing approvals (if any) from the FDA or its foreign equivalent in every country in which Distributor promotes, markets or sells the resulting products. Distributor shall not promote, market or sell products resulting, in whole or in part, from the Bulk Form of the Product in a country unless and until Distributor has obtained such required marketing approval in such country. Distributor shall comply with all applicable regulatory requirements in any country in which Distributor promotes, markets or sells the Products or any products resulting from, in whole or in part, the Products. Distributor shall only sell the completed Vial Form (as defined in Exhibit A), and shall not re-sell the Bulk Form. In order for Halozyme to comply with Quality Systems Regulations (QSR’s) as promulgated by FDA and other regulatory authorities, Distributor must report to Halozyme any product complaints regarding the Product, within fourteen (14) days of the Distributor being informed of such complaint.

 
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4.2   Halozyme Obligations . Halozyme shall provide Distributor, upon Distributor’s request and at Distributor’s reasonable cost, such data and other information (including by granting necessary cross-reference rights) available to Halozyme, and shall execute such certificates and other instruments, as necessary to assist Distributor in obtaining all necessary product registrations for products resulting, in whole or in part, from the Bulk Form of the Product. Prior to incurring any such cost under this Section   4.2 , Halozyme shall, upon Dis tributor’s request, notify Distributor of the estimated cost to provide any such requested data or other information.

5.        Confidentiality .

5.1   Confidential Information . During the term of this Agreement, and for a period of five (5) years following the expiration or earlier termination hereof, each party shall maintain in confidence all Confidential Information (as defined below) disclosed by the other party (including all Confidential Information disclosed prior to the term of this Agreement pursuant to a written confidentiality agreement between the parties), and shall not use, grant the use of or disclose to any third party the Confidential Information of the other party other than as expressly permitted hereby. Each party shall notify the other promptly upon discovery of any unauthorized use or disclosure of the other party’s Confidential Information. As used herein “Con fidential Information” shall mean, with respect to a party, all information (and all tangible and intangible embodiments thereof) that is disclosed by such party to the other party and is marked, identified as or otherwise acknowledged to be confidential at the time of disclosure to the other party. Notwithstanding the foregoing, Confidential Information of a party shall not include information that the other party can establish by written documentation (a) to have been publicly known prior to disclosure of such information by the disclosing party to the receiving party; (b) to have become publicly known, without the fault of the receiving party, subsequent to disclosure of such information by the disclosing party to the receiving party; (c) to have been received by the receiving party at any time from a source, other than the disclosing party, rightfully having possession of and the right to disclose such information; (d) to have been otherwise known by the receiving party prior to disclosure of such information by the disclosing party to the receiving party; or (e) to have been independently developed by employees or agents on behalf of the receiving party without access to or use of such information disclosed by the disclosing party to the receiving party.

5.2   Terms of this Agreement . Except as otherwise provided herein, during the term of this Agreement and for a period of three (3) years thereafter, neither party shall disclose any terms or conditions of this Agreement to any third party without the prior consent of the other party. Notwithstanding the foregoing, prior to the execution of the Agreement, the parties have agreed in writing upon the substance of information that can be used to describe the terms of this transaction (including for the purpose of issuing a press release), and either party may disclose such information, as modified by mutual agreement from time to time, without the other party’s consent. Notwithstanding anything in this Agreement or in any ot her written or oral understanding or agreement to which the parties hereto are parties or by which they are bound, each party (and its representatives, agents and employees) may consult any tax advisor regarding the tax treatment and tax structure of the transaction contemplated by this Agreement and may at any time disclose to any person without limitation of any kind, the tax treatment and tax structure of such transaction and all materials (including opinions or other tax analyses) that are provided relating to such treatment or structure. The preceding sentence is intended to satisfy the requirements for the transaction contemplated herein to avoid classification as a “confidential transaction” in accordance with Treasury Regulations Section 1.6011-4(b)(3) and shall be interpreted consistent with such intent. This authorization is not intended to permit disclosure of any other information relating to the transaction contemplated by this Agreement, including (without limitation) (i) an y portion of any materials to the extent not related to the tax treatment or tax structure of the transaction, (ii) the identities of participants or potential participants in the transaction, (iii) the existence or status of any negotiations, (iv) any pricing or financial information (except to the extent such pricing or financial information is related to the tax treatment or tax structure of the transaction), or (v) any other term or detail not relevant to the tax treatment or the tax structure of the transaction.

 
  5   
 
 
5.3   Limitations on Disclosure . Each party shall limit the disclosure of the Confidential Information of the other party and the terms of this Agreement on a need-to-know basis to those directors, officers, employees, consultants, legal and financial advisors, or permitted assignees, to the extent such disclosure is reasonably necessary in connection with such party’s activities as expressly authorized by this Agreement. To the extent that disclosure is authorized by this Agreement, prior to disclosure, each party hereto shall obtain agreement of any such Person to hold in confidence and not make use of the Confidential Information for any purpose other than those permitted by this Agreement.

5.4   Permitted Disclosures . The confidentiality obligations contained in this Section  5 shall not apply to the extent that such disclosure is reasonably necessary in the following instances: (a) complying with an applicable law, regulation of a governmental agency or order of a court of competent jurisdiction, or responding to a subpoena, request for production of documents or other lawful court process, (b) obtaining approval to test or market a Product, (c) prosecuting or defending litigation, and (d) disclosure to investment bankers, investors, and potential investors, each of whom prior to disclosure must be bound by similar obligations of confident iality and non-use at least equivalent in scope to those set forth in this Section  5 , provided in each case that the disclosing party shall provide written notice thereof to the other party and reasonable opportunity to object to such disclosure or to request confidential treatment thereof, if available.

6.        Intellectual Property Rights .

6.1 Patent Rights . Halozyme does not, either expressly or impliedly, grant any licenses to Distributor under any patents owned or controlled by Halozyme or under which Halozyme has any rights, except the right to sell and use the Product on the terms and subject to the conditions of the Agreement.

6.2   Trademarks and Trade Names . Distributor shall not use any of Halozyme’s trademarks, or any mark or name confusingly similar thereto, as part of its corporate or business name or in any other manner, except that (a) Distributor may identify itself as an authorized Distributor of Halozyme; (b) Distributor shall prominently mark, in addition to Distributor’s own trade dress, any packaging of the Vial Form, on the vial label, with the following brand name “Cumulase TM ”; and on the package insert “Developed by Halozyme Therapeutics Inc., San Diego, California”; (c) Distributor may package Distributor Reformulations with the trademark SynVitro® Cumulase™ provided that there is a package insert accompanying such Distributor Reformulation including the following “Cumulase™ developed by Halozyme Therapeutics, Inc., San Diego, California, USA”; and (d) Distributor shall not register any trade mark or trade name (including any company name) which is identical to or confusingly similar to or incorporates any trade mark or trade name which Halozyme or any associated company owns or claims rights in. Any other use of Halozyme’s trademarks shall be subject to written prior approval from Halozyme. Any goodwill associated with any trade marks affixed or applied or used in relation to Products sold or otherwise distributed by Distributor pursuant to this Agreement shall accrue to the sole benefit of Halozyme. Nothing in this Agreement shall create an obligation on Halozyme to register or otherwise maintain in force any trademarks.

 
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6.3   Vial Form Product Markings . Distributor shall not alter, remove or modify any Halozyme trademarks, labels or markings, nor affix any other trademarks, labels, instructions, warnings or markings to or on the Products sold in Vial Form without Halozyme’s written consent; provided that Distributor may affix labels or other indices on such Products it distributes to identify it as the Distributor of Products so long as such labels do not cover and are not inconsistent with Halozyme’s trademarks, labels or markings.

6.4   Intellectual Property Infringement. The Distributor shall inform Halozyme immediately upon becoming aware of: (i) any infringements or risk of infringements by a third party of Halozyme’s intellectual property (including but not limited to brands, trademarks, copyrights, and patents), (ii) any infringements or risk of infringements by the Products of a third party’s intellectual property or claims of such by a third party. In the event of any such infringement, Distributor shall allow Halozyme to conduct (at Halozyme’s sole expense) the defense or settlement of any claim of intellectual property right infringement by or against a third party in relation to any of Halozyme’s intellectual property. Distribut or shall not compromise, settle or negotiate or make any statement on behalf of Halozyme. At Halozyme’s expense (as to reasonable out-of-pocket expenses only), Distributor shall cooperate with Halozyme in connection with any such infringement defense or prosecution.

6.5   Copyrights . Distributor hereby acknowledges that Halozyme has claimed, or may claim, copyright protection with respect to certain parts of the Products and the labels, inserts and other materials regarding the Products. Distributor further acknowledges the validity of Halozyme’s right to claim copyright protection with respect to such items. Distributor further acknowledges that Halozyme has the exclusive right (to the exclusion of all others) to claim the copyright protection with respect to all such items. If Distributor shall take any action or make any omission that is in any way inconsistent with Halozyme’s claim of copyright protection with respect to such items, such action or omissio n shall be a breach of this Agreement entitling Halozyme to terminate pursuant to Section  7.2 below. Nothing contained in this Section  6.5 shall prohibit Distributor from copying and distributing to its sales representatives Product advertising, literature and other materials prepared by or on behalf of Halozyme for the purpose of fulfilling Distributor’s obligations under the Agreement.

7.       Term and Termination .

7.1   Term . Unless terminated earlier pursuant to or Section  1.2 above or Section  7.2 below, the Agreement shall continue in full force and effect for a term expiring five (5) years following the first commercial shipment to Distributor (the “Initial Period”). Either party may terminate this Agreement to the end of the Initial Period by giving the other party twelve (12) months written notice. If not terminated, this Agreement will be prolonged for successive periods of two (2) years with a possibility for either party to terminate to the end of each prolonga tion period by giving the other party twelve (12) months written notice. The Parties shall enter into good faith negotiations for an amendment to this Agreement, or a subsequent agreement covering the subject matter of the Agreement, after three (3) years following the Effective Date, as part of the phase out of the Distributor’s ovine hyaluronidase product.

 
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7.2 Termination for Cause .

(a)  Except as otherwise provided in Section  8.2 , below, either party may terminate the Agreement upon or after the breach of any material provision of the Agreement by the other party if the other party has not cured such breach within one hundred and twenty (120) days after notice thereof from the nonbreaching party.

(b)   Halozyme shall have the right to terminate this Agreement, effective upon written notice to Distributor, if Distributor does not place an order for Product during any consecutive three (3) month period. Distributor shall have the right to terminate this Agreement, effective upon written notice to Halozyme, if Distributor having used its commercially reasonable efforts to promote, market, distribute and sell the Product is not able during any consecutive three (3) month period to generate profits on the sale of the Product which reasonably reflect the efforts of the Distributor and/or the Distributor’s loss of profits on products that constitute bovine or ovine hyaluronidase following from the exclusivity granted Halozyme under Section 3.3.

7.3   Effect of Expiration and Termination . Expiration or termination of the Agreement shall not relieve the parties of any obligation accruing prior to such expiration or termination. The provisions of Sections  5 , 6 and 8 shall survive the expiration or termination of the Agreement. Upon the expiration or termination by Halozyme of the Agreement, Halozyme shall have the right, at its option, to repurchase Distributor’s inventory of Vial Form Products at Distributor’s purchase price plus reasonable freight, insurance and duties. In the event of termination by the Distributor pursuant to Section  7.2(a) , the Distributor shall have the right to sell the remaining stock of Products. Notwithstanding the foregoing, Distributor and Halozyme shall work together to ensure that outstanding orders for Products made and accepted pursuant to Section  2 prior to the date of such termination are fulfilled. The parties will enter into good faith negotiations and attempt to reach mutual agreement on terms by which the parties would provide each other with reasonable assistance enabling the Distributor to continue delivery of Products under still effective reasonable long-term contracts with customers on the terms and conditions provided for under this Agreement.

8.       Miscellaneous .

8.1   Notices . Any consent, notice or report required or permitted to be given or made under this Agreement by one of the parties to the other shall be in writing, in the English language, delivered by any lawful means, and addressed to such other party at its address indicated in the preamble to this Agreement, or to such other address as the addressee shall have last furnished in writing to the addressor, and (except as otherwise provided in this Agreement) shall be effective upon receipt.

8.2   Force Majeure . Neither party shall be held liable or responsible to the other party nor be deemed to have defaulted under or breached the Agreement for failure or delay in fulfilling or performing any term of the Agreement to the extent, and for so long as, such failure or delay is caused by or results from causes beyond the reasonable control of the affected party including fire, floods, embargoes, war, acts of war (whether war be declared or not), acts of terrorism, insurrections, riots, civil commotions, strikes, lockouts or other labor disturbances, acts of God or acts, omissions or delays in acting by any governmental authority or the other party.

 
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8.3   Assignment . Distributor shall not, without the prior express written consent of Halozyme which shall not be unreasonably withheld or delayed, assign or transfer this Agreement or any of its rights or obligations hereunder, whether directly or indirectly, whether in whole or in part, or whether voluntarily, by operation of law, in connection with its merger, consolidation, sale of all or substantially all of its assets, change in control or similar transaction, or otherwise. Any assignment or transfer in violation of this Section  8.3 shall be void.

8.4   Severability . Each party hereby acknowledges that it does not intend to violate any public policy, statutory or common laws, rules, regulations, treaty or decision of any government agency or executive body thereof of any country or community or association of countries. Should one or more provisions of this Agreement be or become invalid, the parties shall substitute, by mutual consent, valid provisions for such invalid provisions which valid provisions in their economic effect are sufficiently similar to the invalid provisions that it can be reasonably assumed that the parties would have entered into this Agreement with such provisions. In case such provisions cannot be agreed upon, the invalidity of one or several provisio ns of this Agreement shall not affect the validity of this Agreement as a whole, unless the invalid provisions are of such essential importance to the Agreement that it is to be reasonably assumed that the parties would not have entered into this Agreement without the invalid provisions.

8.5   Entire Agreement . This Agreement contains the entire understanding of the parties with respect to the subject matter hereof. All express or implied agreements, understandings, or representations either oral or written, heretofore made are expressly superseded by the Agreement. The Agreement may be amended, or any term hereof modified, only by a written instrument duly executed by both parties.

8.6   Headings . The captions to the several Articles and Sections hereof are not a part of the Agreement, but are merely guides or labels to assist in locating and reading the several Articles and Sections hereof.

8.7   Independent Contractors . It is expressly agreed that Halozyme and Distributor shall be independent contractors and that the relationship between the two parties shall not constitute a partnership, joint venture or agency. Neither Halozyme nor Distributor shall have the authority to make any statements, representations or commitments of any kind, or to take any action, which shall be binding on the other, without the prior consent of the party to do so.

8.8   Waiver . The waiver by either party of any right hereunder or the failure to perform or of a breach by the other party shall not be deemed a waiver of any other right hereunder or of any other breach or failure by said other party whether of a similar nature or otherwise.

 
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8.9 Counterparts . The 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.

IN WITNESS WHEREOF, the parties have executed the Agreement as of the Effective Date.
MediCult A/S
 
By:        /s/ Lars Ronn                               
Name:     Lars Ronn                                    
Title:     CEO                                             
 
HALOZYME THERAPEUTICS, INC.
 
By:      /s/ Jonathan Lim                    
Name: Jonathan Lim                         
Title:   President and CEO                


 
  10  
 
EXHIBIT A



Products


1.    Description of Product . A 10x concentrate (800 USP units/mL) of recombinant human hyaluronidase in buffered solution and stabilized with recombinant human serum albumin (rHSA).

2.     Product Forms . The Product is available in either (a) a 100 L labeled vial containing approximately 80 USP units of re combinant human hyaluronidase in the solution describe above (the “Vial Form”), or (b) a bottle containing approximately 80,000 USP units of the solution without the addition of recombinant HSA (rHSA) (the “Bulk Form”). The parties acknowledge and agree that the Vial Form shall not be available to Distributor under this Agreement for distribution in any country unless and until Halozyme has received the required marketing approval (if any) from the FDA or its foreign equivalent in such country. Distributor shall only re-sell the Vial Fo rm.

3.     Price . The following are the prices for the Vial Form and Bulk Form:

Form                     Recommended List Price          Transfer Price

Vial Form                 ***                 ***

Bulk Form                                      ***                                         ***



 
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EXHIBIT B


 
Testing of Product


 
Distributor shall test each Product as follows.

(A)     With respect to each Vial Form of Product purchased from Halozyme, Distributor shall visually inspect each product for proper labeling prior to shipment.

(B)     With respect to each Bulk Form of Product purchased from Halozyme, Distributor shall test each lot of finished product derived by Distributor from such Bulk Form of Product as follows (i) determine the potency of the recombinant human hyaluronidase by USP monograph, (ii) verify the sterility of the product, (iii) verify the pH, (iv) conduct a mouse embryo toxicity assay, and (v) verify the osmolality. All product testing must be performed with validated procedures.






 
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Exhibit 10.7
CONFIDENTIAL TREATMENT REQUESTED – EDITED COPY




NON-EXCLUSIVE DISTRIBUTION AGREEMENT

THIS NON-EXCLUSIVE DISTRIBUTION AGREEMENT (this “Agreement”), dated as of April 13, 2004 (the “Effective Date”) is entered into between COOK OB/GYN INCORPORATED (“Distributor”), an Indiana corporation, having a place of business located at 1100 West Morgan Street, Spencer, Indiana 47460, and HALOZYME THERAPEUTICS, INC. (“Halozyme”), a California corporation, having a principal place of business at 11588 Sorrento Valley Road, Suite 17, San Diego, CA 92121. The parties hereby agree as follows:

1.   Appointment and Scope .

1.1   Appointment . Subject to the terms and conditions set forth herein and for the term of the Agreement, Halozyme hereby appoints Distributor as a non-exclusive, worldwide distributor of the recombinant human hyaluronidase described on Exhibit A (the “Product(s)”). Distributor hereby accepts such appointment.

1.2   Independent Purchaser Status . Distributor shall be an independent distributor, purchaser and seller of the Product. Neither party shall act as an agent or legal representative of the other, nor shall either party have any right or power to act for or bind the other in any respect or to pledge its credit. Distributor shall not make any covenant to any third party regarding Halozyme or the Products other than those covenants that Halozyme has authorized Distributor to make in writing. Except as expressly set forth herein, Distributor shall be free to resell the Product on such terms as it may, in its sole discretion, determine, including price, returns, credits and discounts. The detailed operations of Distributor under the Agree ment are subject to the sole control and management of Distributor.

2.   Terms and Conditions of Supply of Products . Halozyme shall manufacture, sell and deliver, and Distributor shall purchase from Halozyme, such Products as Distributor requires for resale on the terms and subject to the conditions set forth below:

2.1   Price . The price for the Product shall be (a) the transfer price set forth on Exhibit A, or (b) in the event that the FDA or its foreign equivalent should materially change its regulatory policy(ies) resulting in an improved market for the Product (including without limitation a policy change resulting in the withdrawal of market approval for bovine or ovine hyaluronidase products), the price negotiated in good faith between the parties taking into account such policy change. If the parties cannot agree to a price as provided in (b), above, the price shall be as stated on Exhibit A.

2.2    Delivery . All the Product supplied under this Agreement shall be shipped FCA (Incoterms 2000) place of manufacture to such location as designated by Distributor in the applicable purchase order. Distributor shall pay all freight, insurance charges, taxes, import and export duties, inspection fees and other charges applicable to the sale and transport of the Product purchased by Distributor hereunder. Title to the Product purchased by Distributor hereunder shall pass to Distributor upon the delivery of the Products to the common carrier selected by Distributor.
____________________________________
*** Confidential material redacted and submitted separately to the Securities and Exchange Commission.

 

 

  1   
 
 
2.3   Sales and Use Taxes . Distributor shall pay any federal, state, county or municipal sales or use tax, excise or similar charge, or other tax assessment (other than that assessed against income), assessed or charged on the sale by Distributor of the Product sold pursuant to this Agreement.

2.4    Payments . Distributor shall pay Halozyme within forty-five (45) days from date of the applicable invoice by Halozyme to Distributor for all Products purchased hereunder for sale by Distributor, unless subject to a bona fide dispute regarding case count, shipping, damage or purported Product defects. In the event of a bona fide dispute, Distributor agrees to pay the portion of the invoice not in dispute within the time frame specified above. Distributor shall make all payments under the Agreemen t to Halozyme in United States dollars to such account as Halozyme advises Distributor from time to time. Halozyme shall not invoice Distributor for Products until Halozyme has shipped Products that are the subject of the invoice.

2.5 Forecasts . On or before March 31 st , 2005, and prior to the first day of each calendar month thereafter, Distributor shall prepare and provide Halozyme with a written forecast of the estimated requirements of Distributor for each month in the succeeding twelve (12) months (the “Forecasts”). Halozyme acknowledges and agrees that Distributor’s Product requirements set forth in the Forecasts are estimates only.

2.6   Orders . Distributor shall make all purchases hereunder by submitting firm purchase orders to Halozyme via facsimile or other medium agreed to by the parties. Each such purchase order shall be in writing in a form reasonably acceptable to Distributor and Halozyme, and shall specify the quantity ordered, the transfer price therefor under Section 2.1 above, the place of delivery and the required delivery date therefor, which shall not be less than thirty (30) days after the date of such purchase order. Each order will be confirmed in writing by Halozyme within three business days (3) of receipt (Monday through Friday) and will identify any delay Halozyme anticipates it may hav e in meeting the terms of the order as required by Distributor. In the event of a conflict between the terms and conditions of any purchase order and this Agreement, the terms and conditions of this Agreement shall prevail. Any additional terms in such purchase order shall be of no force or effect unless expressly agreed to in writing by Halozyme and Distributor.

2.7   Returned Goods . If any Product does not conform to the specifications provided by Halozyme when received by Distributor or Distributor’s designee (other than as a result of the action or inaction of the common carrier selected by Distributor) or does not pass Distributor’s quality control, then for a period of thirty (30) days following the delivery of such Product to Distributor for patent defects and thirty (30) days after discovery for latent defects, Distributor shall have the right to return such Product to Halozyme in accordance with the reasonable instructions of Halozyme or, on Halozyme’s request, dispose of such Product. In both cases all costs shall be borne by Halozyme. Should any Products be returned as provided above, Halozyme shall replace the returned Products as soon as reasonably practicable. Such replacement Products shall be at no additional cost to Distributor if Distributor had previously paid Halozyme for the returned Products. Prior to return shipment, Distributor shall notify Halozyme of the nature of the product failure as per pre-established standard operating procedures. Halozyme reserves the right to re-test any such returned products. The parties agree to employ a mutually acceptable independent laboratory or consultant to resolve disputes arising under this Section 2.7 and shall share equally in the costs of such laboratory or consultant. The parties further agree that the results of the independent party’s findings and resolution of the dispute shall be binding.

 
  2   
 
 
2.8 Warranty . Halozyme represents and warrants that (i) the Products are manufactured in accordance with cGMP as established by the United States Food & Drug Administration, (ii) the Products are true to label, (iii) the Products are free from defects in materials and workmanship, (iv) the Products conform to Halozyme’s then current manufacturing specifications, (v) Halozyme has clear title to the Products, (vi) the Products shall be delivered free and clear of all liens and encumbrances, (vii) to the best of Halozyme’s knowledge, neither the composition of matter of the Products nor their use in in-vitro fertilization or cryopreservation of oocytes infringe issued pate nts of any third party, nor to the best of Halozyme’s knowledge would such composition or use fall within the scope of claims of pending third party patent applications, (viii) the Products will not be adulterated within the meaning of the FD&C Act, (ix) the Products shall have all necessary government and regulatory approvals required for the intended use as set forth on the label (except as set forth in Section 4.1 for the Bulk Form, as defined in Exhibit A); and (x) when the Products are delivered by Halozyme to the common carrier selected by Distributor, the Products shall have a minimum expiration date so that its remaining shelf life is at least three (3) months. Halozyme’s certifies to Distributor that, to the best of Halozyme’s knowledge, Halozyme has not used, and will not use, the services of any person debarred under any applicable law or regulation in connection with the manufacture of Products hereunder. This certification applies in respect of officers, agents, and employees of Halozyme, as well as third parties, with whom Halozyme may subcontract. Halozyme may request the return of any alleged non-conforming Product in order to substantiate a claim under its warranties, and Distributor, shall assist Halozyme with such return if it has such Product in its possession or has reasonable access to same.

EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, HALOZYME MAKES NO OTHER WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE PRODUCT. HALOZYME DISCLAIMS ALL OTHER WARRANTIES, EXPRESS AND IMPLIED, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

2.9   Alternate Packaging . If Distributor desires to obtain any packaging configuration for the Vial Form of Product other than Halozyme’s standard packaging for the Vial Form of Product, the parties shall negotiate in good faith and attempt to reach mutually agreeable terms regarding such packaging configurations and the additional price therefor.

3.   Covenants of Distributor .

3.1   Sales Promotion . Distributor shall use its commercially reasonable efforts to promote the sale and use of the Product in North America, South America, the European Union and Asia.

3.2   Expenses . Distributor shall be responsible for all of its own expenses and employees in connection with its activities contemplated by the Agreement. Distributor shall incur no expense chargeable to Halozyme, except as may be specifically authorized in advance in writing in each case by Halozyme.

 
  3   
 
 
3.3   Exclusivity . The date upon which both the first FDA clearance of the Product has been obtained and the first commercial shipment to Distributor has occurred shall be deemed the “Clearance Date”. Within *** months after the Clearance Date (the “Notice Period”), Distributor shall notify Halozyme whether or not Distributor agrees to discontinue promotion, marketing and selling any product that constitutes *** in North America or the European Union, except in connection with satisfying pre-existing contracts that (i) were entered into prior to the Clearance Date and (ii) with respect to the supply of ***, after the Clearance Date, were not ame nded to extend the term of the contract (“Pre-Existing Contracts”) . If Distributor fails to so notify Halozyme within the Notice Period, or notifies Halozyme that Distributor shall not discontinue such promotion, marketing and selling, then Halozyme upon written notice to Distributor at any time prior to ninety (90) days after expiration of the Notice Period may terminate this Agreement effective thirty (30) days after such notice is given to Distributor and the parties shall have no further rights or obligations hereunder, subject to Section 7.3 of this Agreement . If Distributor notifies Halozyme within the Notice Period that it shall discontinue such promotion, marketing and selling, then Distributor shall, following such notice, discontinue such promotion, marketing and selling e x cept in connection with satisfying Pre-Existing Contracts.

3.4   No Bundling . Distributor, as its only method of distributing Product, shall not condition the sale or transfer of the Product with the sale or transfer of any other product or the use of any service. For a period of one (1) year following the date Distributor commences distribution of the Vial Form (as defined in Exhibit A) of the Product, Distributor shall distribute each Vial Form of Product in separate individually boxed packaging with a separate invoice price.

3.5   Testing of Product . Distributor shall conduct the testing of the Product as set forth on Exhibit B.

4.   Regulatory Filings .

4.1   Distributor Obligations . If Distributor selects the Bulk Form (as defined in Exhibit A) of the Product, in whole or in part, Distributor shall obtain all required marketing approvals (if any) from the FDA or its foreign equivalent in every country in which Distributor promotes, markets or sells the resulting products. Distributor shall not promote, market or sell products resulting, in whole or in part, from the Bulk Form of the Product in a country unless and until Distributor has obtained such required marketing approval in such country. Distributor shall comply with all applicable regulatory requirements in any country in which Distributor promotes, markets or sells the Products or any products resulting from, in whole or i n part, the Products. Distributor shall only sell the completed Vial Form (as defined in Exhibit A), and shall not re-sell the Bulk Form except as modified by Distributor. Distributor will comply with Quality Systems Regulations in connection with reporting to Halozyme any product complaints regarding the Product.

4.2   Halozyme Obligations . Halozyme, at its expense, shall (a) obtain and maintain all government approvals from the FDA or its foreign equivalent for the promotion, marketing and sale of the Vial Form of Product in (i) North America and the European Union, and (ii) in other major markets around the world and in other countries where (A) the Distributor promotes, markets or sells the Vial Form of Product and (B) the parties agree in advance in writing, and (b) provide Distributor, upon Distributor’s request, such data and other information (including by granting necessary cross-reference rights) available to Halozyme, and execute such certificates and other instruments, all as neces sary to assist Distributor in obtaining all necessary product registrations and regulatory approvals for products resulting, in whole or in part, from the Bulk Form of the Product.

 
  4   
 
 
4.3   Biologic or Drug Regulatory Filings . In those countries which designate the Product as a biologic or drug (collectively, the “Biologic Countries”), Halozyme, at its expense, notwithstanding Section 4.1 to the contrary, shall obtain and maintain all governmental approvals in the Biologic Countries for the promotion, marketing and sale of Products resulting, in whole or in part, from the Bulk Form of the Product. If, with respect to a Biologic Country that Distributor has then-current plans to distribute the Product, Distributor desires to have Halozyme obtain such governmental approval in such Biologic Country, then Distributor shall provide t o Halozyme written notice of such country. In the event Halozyme fails to file for and thereafter obtain and maintain such governmental approvals in such Biologic Country in a commercially reasonable time period after receipt of such written notice from Distributor, then, as Distributor’s sole and exclusive remedy for Halozyme’s failure to obtain such governmental approval in such Biologic Country, Distributor shall have the right, notwithstanding Section 3.3 or any representations made by Distributor pursuant to Section 3.3 to the contrary, to promote, market and sell any product that constitutes bovine or ovine hyaluronidase in such Biologic Country.

5.   Confidentiality .

5.1   Confidential Information . During the term of this Agreement, and for a period of five (5) years following the expiration or earlier termination hereof, each party shall maintain in confidence all Confidential Information (as defined below) disclosed by the other party (including all Confidential Information disclosed prior to the term of this Agreement pursuant to a written confidentiality agreement between the parties), and shall not use, grant the use of or disclose to any third party the Confidential Information of the other party other than as expressly permitted hereby. Each party shall notify the other promptly upon discovery of any unauthorized use or disclosure of t he other party’s Confidential Information. As used herein “Confidential Information” shall mean, with respect to a party, all information (and all tangible and intangible embodiments thereof) that is disclosed by such party to the other party and is marked, identified as or otherwise acknowledged to be confidential at the time of disclosure to the other party. Notwithstanding the foregoing, Confidential Information of a party shall not include information that the other party can establish by written documentation (a) to have been publicly known prior to disclosure of such information by the disclosing party to the receiving party; (b) to have become publicly known, without the fault of the receiving party, subsequent to disclosure of such information by the disclosing party to the receiving party; (c) to have been received by the receiving party at any time from a source, other than the disclosing party, with no obligation of confidentiality; (d) to have been otherwise kn o wn by the receiving party prior to disclosure of such information by the disclosing party to the receiving party; or (e) to have been independently developed by employees or agents on behalf of the receiving party without access to or use of such information disclosed by the disclosing party to the receiving party.

5.2   Terms of this Agreement . Except as otherwise provided herein, during the term of this Agreement and for a period of three (3) years thereafter, neither party shall disclose any terms or conditions of this Agreement to any third party without the prior consent of the other party. Notwithstanding the foregoing, prior to the execution of the Agreement, the parties have agreed in writing upon the substance of information that can be used to describe the terms of this transaction (including for the purpose of issuing a press release), and either party may disclose such information, as modified by mutual agreement from time to time, without the other party’s consent. Notwithstanding anything in this Agreement or in any oth er written or oral understanding or agreement to which the parties hereto are parties or by which they are bound, each party (and its representatives, agents and employees) may consult any tax advisor regarding the tax treatment and tax structure of the transaction contemplated by this Agreement. This authorization is not intended to permit disclosure of any other information relating to the transaction contemplated by this Agreement, including (without limitation) (i) any portion of any materials to the extent not related to the tax treatment or tax structure of the transaction, (ii) the identities of participants or potential participants in the transaction, (iii) the existence or status of any negotiations, (iv) any pricing or financial information (except to the extent such pricing or financial information is related to the tax treatment or tax structure of the transaction), or (v) any other term or detail not relevant to the tax treatment or the tax structure of the transaction .

 
  5   
 
 
5.3   Limitations on Disclosure . Notwithstanding Section 5.1 and 5.2 to the contrary, each party may disclose Confidential Information of the other party and the terms of this Agreement on a need-to-know basis to those directors, officers, employees, consultants, legal and financial advisors, or permitted assignees, to the extent such disclosure is reasonably necessary in connection with such party’s activities as expressly authorized by this Agreement. To the extent that disclosure is authorized by this Agreement, prior to disclosure, each party hereto shall obtain agreement of any such Person to hold in confidence and not make use of the Confidential Information for any purpose other than those permitted by this Agreement.

5.4   Permitted Disclosures . The confidentiality obligations contained in this Section 5 shall not apply to the extent that such disclosure is reasonably necessary in the following instances: (a) complying with an applicable law, regulation or order of a governmental agency; or order of a court of competent jurisdiction; or responding to a subpoena, request for production of documents or other lawful court process, (b) obtaining approval to test or market or sell a Product or a product resulting, in whole or in part, from the Bulk Form of Product, (c) prosecuting or defending litigation, and (d) disclosure to investment bankers, investors, and potential invest ors, each of whom prior to disclosure must be bound by similar obligations of confidentiality and non-use at least equivalent in scope to those set forth in this Section 5, provided in each case that the disclosing party shall provide written notice thereof to the other party and reasonable opportunity to object to such disclosure or to request confidential treatment thereof, if available.

6.   Intellectual Property Rights .

6.1   Patent Rights . Halozyme does not, either expressly or impliedly, grant any licenses to Distributor under any patents owned or controlled by Halozyme or under which Halozyme has any rights, except the right to sell, import, distribute and use the Product and products resulting, in whole or in part, from the Bulk Form of Product on the terms and subject to the conditions of the Agreement.

6.2   Trademarks and Trade Names . Distributor shall not use any of Halozyme’s trademarks, or any mark or name confusingly similar thereto, as part of its corporate or business name or in any other manner, except that (a) Distributor may identify itself as an authorized Distributor of Halozyme; (b) Distributor shall prominently mark, in addition to Distributor’s own trade dress, any packaging of the Vial Form, on the vial label, with the following brand name “Cumulase TM ”; and on the package insert “Developed by Halozyme Therapeutics Inc., San Diego, California”, and; (c) Dis tributor shall not register any trade mark or trade name (including any company name) which is identical to or confusingly similar to or incorporates any trade mark or trade name which Halozyme owns or claims rights in. Any other use of Halozyme’s trademarks shall be subject to written prior approval from Halozyme. Any goodwill associated with any trade marks affixed or applied or used in relation to Products sold or otherwise distributed by Distributor pursuant to this Agreement shall accrue to the sole benefit of Halozyme. Nothing in this Agreement shall create an obligation on Halozyme to register or otherwise maintain in force any trademarks.

 
  6   
 
 
6.3   Vial Form Product Markings . Distributor shall not alter, remove or modify any Halozyme trademarks, labels or markings, nor affix any other trademarks, labels, instructions, warnings or markings to or on the Products sold in Vial Form without Halozyme’s written consent; provided that Distributor may affix labels or other indices on such Products it distributes to identify it as the Distributor of Products so long as such labels do not cover and are not inconsistent with Halozyme’s trademarks, labels or markings.

6.4   Intellectual Property Infringement. Distributor shall inform Halozyme immediately upon becoming aware of: (i) any infringements by a third party of Halozyme’s intellectual property (including but not limited to brands, trademarks, copyrights, and patents), (ii) any infringements by the Products of a third party’s intellectual property or claims of such by a third party. In the event of any such infringement, Distributor shall allow Halozyme to conduct (at Halozyme’s sole expense) the defense or settlement of any claim of intellectual property right infringement by or against a third party in relation to any of Halozyme’s intellectual property. Distributor shall not compromise, settle or negotiate or make an y statement on behalf of Halozyme. At Halozyme’s expense (as to reasonable out-of-pocket expenses only), Distributor shall cooperate with Halozyme in connection with any such infringement defense or prosecution. Halozyme shall not settle any such claims if such settlement would adversely affect Distributor’s rights hereunder.

6.5   Copyrights . Distributor hereby acknowledges that Halozyme has claimed, or may claim, copyright protection with respect to certain parts of the Products and the labels, inserts and other materials regarding the Products. Distributor further acknowledges the validity of Halozyme’s right to claim copyright protection with respect to such items. Distributor further acknowledges that it has no right to claim the copyright protection with respect to all such items. If Distributor shall take any action or make any omission that is in any way inconsistent with Halozyme’s claim of copyright protection with respect to such items, such action or omission shall be a breach of this Agreement under Section 7.2(c) below. Nothing contained in this Section 6.5 shall prohibit Distributor from copying and distributing to its sales representatives Product advertising, literature and other materials prepared by or on behalf of Halozyme for the purpose of fulfilling Distributor’s obligations under the Agreement.

7. Term and Termination .

7.1   Term . Unless terminated earlier pursuant to Section 7.2 below, the Agreement shall continue in full force and effect for a term expiring five (5) years following the first commercial shipment of Product to Distributor (the “Term”). The Term automatically shall be extended for three (3) additional periods of five (5) years each unless either party gives notice to the other party at least 180 days prior to the expiration of the then current term that the Agreement shall not be extended.

 
  7   
 
 
7.2   Termination for Cause .

(a)  Except as otherwise provided in Section 7.2(b), below, either party may terminate the Agreement upon or after the breach of any material provision of the Agreement by the other party if the other party has not cured such breach within sixty (60) days after notice thereof from the nonbreaching party.

(b)   Halozyme shall have the right to terminate this Agreement, effective upon written notice to Distributor, if Distributor does not place an order for Product during any consecutive six (6) month period commencing one (1) year after the first commercial shipment of Product to Distributor.

7.3   Effect of Expiration and Termination . Expiration or termination of the Agreement shall not relieve the parties of any obligation accruing prior to such expiration or termination. The provisions of Sections 2.8, 5, 6, 8 and 9 shall survive the expiration or termination of the Agreement. Upon the expiration or termination of the Agreement, Halozyme shall have the right, at its option, to repurchase Distributor’s inventory of Products at Distributor’s purchase price plus reasonable freight, insurance and duties. In all other cases, Distributor shall have the right to sell the remaining stock of Products for a period of six (6) months following such expiration or termination. Notwithstanding the forego ing, Distributor and Halozyme shall negotiate in good faith the continuation of the delivery of Products due to still effective long-term contracts with customers. Halozyme either (a) shall continue to sell Products directly to such customers, or at Halozyme’s option, (b) enable Distributor to continue to purchase Products and to resell the same only to customers holding such long term contracts, on the terms and conditions provided for under this Agreement.

8.   Indemnification .

8.1  Each party (the “Indemnitor”) shall indemnify and hold harmless the other party and their respective directors, officers, employees, agents and insurers (each an “Indemnitee”), from and against any and all demands, actions, defense of actions, causes of action (whether judicial, administrative or otherwise), losses, claims, damages, judgments, fees, expenses (including without limitation attorneys’ fees, interest, penalties, investigative expenses and court costs) and liabilities to the extent arising from third party claims for any one or more of the following:

(a)   any breach by Indemnitor of its obligations, representations or warranties set forth in this Agreement; or

(b)   the negligence or willful misconduct of the Indemnitor, its agents, contractors or employees in connection with this Agreement.

8.2   Procedure . An Indemnitee that intends to claim indemnification under this Section 8 shall promptly notify the Indemnitor of any claim, demand, action or other proceeding for which the Indemnitee intends to claim such indemnification. The Indemnitor shall have the right to participate in, and to the extent the Indemnitor so desires jointly with any other indemnitor similarly noticed, to assume the defense thereof with counsel selected by the Indemnitor; provided, however, that the Indemnitee shall have the right to retain its own counsel, with the fees and expenses to be paid by the Indemnitor, if representation of the Indemnitee by the counsel retained by the Indemnitor would be inappropriate due to actual or potential di ffering interests between the Indemnitee and any other party represented by such counsel in such proceedings. The indemnity obligations under this Section 8 shall not apply to amounts paid in settlement of any claim, demand, action or other proceeding if such settlement is effected without the prior express written consent of the Indemnitor, which consent shall not be unreasonably withheld or delayed. The failure to deliver notice to the Indemnitor within a reasonable time after notice of any such claim or demand, or the commencement of any such action or other proceeding, if prejudicial to its ability to defend such claim, demand, action or other proceeding, shall relieve such Indemnitor of any liability to the Indemnitee under this Section 8 with respect thereto, but the omission so to deliver notice to the Indemnitor shall not relieve it of any liability that it may have to the Indemnitee otherwise than under this Section 8. The Indemnitor may not settle or otherwise consent to an adverse j udgment in any such claim, demand, action or other proceeding that diminishes the rights or interests of the Indemnitee without the prior express written consent of the Indemnitee, which consent shall not be unreasonably withheld or delayed. The Indemnitee, its employees and agents, shall reasonably cooperate with the Indemnitor and its legal representatives in the investigation of any claim, demand, action or other proceeding covered by this Section 8.

 
  8   
 
 
9.   Miscellaneous .
 
9.1   Notices . Any consent, notice or report required or permitted to be given or made under this Agreement by one of the parties to the other shall be in writing, in the English language, delivered by any lawful means, and addressed to such other party at its address indicated in the preamble to this Agreement, or to such other address as the addressee shall have last furnished in writing to the addressor, and (except as otherwise provided in this Agreement) shall be effective upon receipt:

“Halozyme”                     “Distributor”
      Halozyme Therapeutics, Inc.                         Cook Ob/Gyn Incorporated
      11588 Sorrento Valley Road, Suite 17         1100 West Morgan Street
      San Diego, California 92121         Spencer, Indiana 47460
      Attn: President and CEO                              Attn: President
      Telephone No.: 858-794-8889                     Telephone No.: 812-829-4891
      Facsimile No. 858-259-2539                       Facsimile No.: 812-829-1801



9.2   Force Majeure . Neither party shall be held liable or responsible to the other party nor be deemed to have defaulted under or breached the Agreement for failure or delay in fulfilling or performing any term of the Agreement to the extent, and for so long as, such failure or delay is caused by or results from causes beyond the reasonable control of the affected party including fire, floods, embargoes, war, acts of war (whether war be declared or not), acts of terrorism, insurrections, riots, civil commotions, strikes, lockouts or other labor disturbances, acts of God or acts, omissions or delays in acting by any governmental authority or the other party. In the event that a force majeure event interrupts Halozyme’s supply of products to Distributor for more than sixty (60) days, Distributor shall have the right to terminate this Agreement.
 
9.3   Assignment . Neither party shall, without the prior express written consent of the other party which shall not be unreasonably withheld or delayed, assign or transfer this Agreement or any of its rights or obligations hereunder, whether directly or indirectly, whether in whole or in part, or whether voluntarily, by operation of law, in connection with its merger, consolidation, sale of all or substantially all of its assets, change in control or similar transaction, or otherwise; provided, however, that Distributor or Halozyme shall be permitted to assign this Agreement to an affiliate in connection with the sale of all or substantially all of the business of the as signor. Any assignment or transfer in violation of this Section 9.3 shall be void.

 
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9.4   Severability . Each party hereby acknowledges that it does not intend to violate any public policy, statutory or common laws, rules, regulations, treaty or decision of any government agency or executive body thereof of any country or community or association of countries. Should one or more provisions of this Agreement be or become invalid, the parties shall substitute, by mutual consent, valid provisions for such invalid provisions which valid provisions in their economic effect are sufficiently similar to the invalid provisions that it can be reasonably assumed that the parties would have entered into this Agreement with such provisions. In case such provisions cannot be agreed upon, the invalidity of one or sev eral provisions of this Agreement shall not affect the validity of this Agreement as a whole, unless the invalid provisions are of such essential importance to the Agreement that it is to be reasonably assumed that the parties would not have entered into this Agreement without the invalid provisions.
 
9.5   Entire Agreement . This Agreement contains the entire understanding of the parties with respect to the subject matter hereof. All express or implied agreements, understandings, or representations either oral or written, heretofore made are expressly superseded by the Agreement. The Agreement may be amended, or any term hereof modified, only by a written instrument duly executed by both parties.
 
9.6   Headings . The captions to the several Articles and Sections hereof are not a part of the Agreement, but are merely guides or labels to assist in locating and reading the several Articles and Sections hereof.

9.7   Independent Contractors . It is expressly agreed that Halozyme and Distributor shall be independent contractors and that the relationship between the two parties shall not constitute a partnership, joint venture or agency. Neither Halozyme nor Distributor shall have the authority to make any statements, representations or commitments of any kind, or to take any action, which shall be binding on the other, without the prior consent of the party to do so.
 
9.8   Waiver . The waiver by either party of any right hereunder or the failure to perform or of a breach by the other party shall not be deemed a waiver of any other right hereunder or of any other breach or failure by said other party whether of a similar nature or otherwise.

9.9   Counterparts . The 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.

9.10   Headings. The headings used in this Agreement are included for ease of reference, and shall not affect the construction or interpretation of this Agreement in any manner. All references to paragraph, sections and headings in this Agreement shall be to such paragraphs, sections and headings set forth herein, except as otherwise specifically stated.

 
     
 
 
9.11   Attorney’s Fees . The successful party in any litigation, arbitration or other dispute resolution proceeding to enforce the terms and conditions of this Agreement shall be entitled to recover from the other party reasonable attorney’s fees and related costs involved in connection with such litigation, arbitration or dispute resolution proceeding.

9.12   Authority. The undersigned represent and warrant that they have authority to execute this Agreement on behalf of the parties and to carry out all such parties’ respective obligations arising under this Agreement.


IN WITNESS WHEREOF, the parties have executed the Agreement as of the Effective Date.
COOK OB/GYN
By:      /s/ Frank Fischer                           
Name: Frank Fischer                              
Title:  V.P. Operations                              
 
HALOZYME THERAPEUTICS, INC.
By:       /s/ Jonathan Lim                       
Name:  Jonathan Lim                         
Title:    President and CEO                 


 
  11  
 
EXHIBIT A


 
Products

 
1. Description of Product . A 10x concentrate (800 USP units/mL) of recombinant human hyaluronidase in buffered solution and stabilized with recombinant human serum albumin (rHSA).

pH- 7.2 – 7.6
Sterility- Sterility achieved through an aseptic process qualified to provide a SAL 10 -3
Mouse Embryo Toxicity Assay = 80% rate of expanded blastocysts
Bacterial endotoxins- (LAL assay) < 0.5 EU/ml
Potency- 800U/ml (target specification of 700-900U/ml) of hyaluronidase activity per USP test (or valid modified) methodology
Osmolality- 270 – 290

Ingredients rHSA, CaCl2,  MgCl2, KCl, NaCl

2.   Product Forms . The Product is available in either (a) a 100 L labeled vial containing approximately 80 USP units of recombinant human hyaluronidase in the solution describe above (the “Vial Form”), or (b) a b ottle containing approximately 80,000 USP units of the solution described above (the “Bulk Form”). The parties acknowledge and agree that the Vial Form shall not be available to Distributor under this Agreement for distribution in any country unless and until Halozyme has received the required marketing approval (if any) from the FDA or its foreign equivalent in such country. Distributor shall only re-sell the Vial Form.

3. Price . The following are the prices for the Vial Form and Bulk Form:

                  Form                 Recommended List Price         Transfer Price

Vial Form                    ***                               ***

Bulk Form                             ***                      ***



 
  12  
 
EXHIBIT B


Testing of Product


Distributor shall test each Product as follows.

(A)  With respect to each Vial Form of Product purchased from Halozyme, Distributor shall visually inspect each product for proper labeling prior to shipment.

(B)  With respect to each Bulk Form of Product purchased from Halozyme, Distributor shall test each lot of finished product derived by Distributor from such Bulk Form of Product as follows (i) determine the potency of the recombinant human hyaluronidase by USP monograph, (ii) , Achieve sterility through an aseptic process qualified to provide a SAL 10 -3 (iii) verify the pH, (iv) conduct a mouse embryo toxicity assay, and (v) verify the osmolality. All product testing must be performed with validated procedures.







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CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We consent to the use in this Registration Statement on Form SB-2 of our report dated March 23, 2004, relating to the financial statements of Halozyme Therapeutics, Inc., and to the reference to our Firm under the caption “Experts” in the Prospectus.

/s/ CACCIAMATTA ACCOUNTANCY CORPORATION

Irvine, California
April 23, 2004
 
 
 
  1   
 
 
 
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We consent to the use in this Registration Statement on Form SB-2 of our report dated January 7, 2004, relating to the financial statements of DeliaTroph Pharmaceuticals, Inc., and to the reference to our Firm under the caption “Experts” in the Prospectus.

                                                                                                                                                      /s/ CACCIAMATTA ACCOUNTANCY CORPORATION

Irvine, California
April 23, 2004